T YOU A ERVI R CE ? S THE PROMISE OF SERVICES-LED GROWTH IN UZBEKISTAN Y OU R AT ERVICE ? S THE PROMISE OF SERVICES-LED GROWTH IN UZBEKISTAN © 2024 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with exter- nal contributions. The findings, interpretations, and conclusions ex- pressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data includ- ed in this work. The boundaries, colors, denominations, and other in- formation shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any ter- ritory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. 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Cover Design: Ellie Foster, London, United Kingdom Layout design and typesetting: Piotr Ruczynski, London, United Kingdom Contents Acknowledgements   8 Abbreviations   9 Executive Summary    10 CHAPTER 1 The Services Sector and Structural Transformation    16 The contribution of the services sector to growth and jobs   17 Inside the black box of the services sector   21 CHAPTER 2 A Policy Agenda for Services: Contestability, Connectivity, and Capabilities    30 Contestability: Trade restrictions and domestic market competitiveness   33 Connectivity: Enabling digital and physical connections   40 Capabilities: Enhancing worker skills and management practices in firms   43 CHAPTER 3 Strengthening the Linkages between Services and Other Sectors     47 Weak linkages between services and other sectors   48 Telecommunications: The backbone for digitalizing the economy   53 Transportation and logistics: Facilitating trade in goods and movement of people   56 CHAPTER 4 Expanding Global Innovator Services     63 The nascency of export-led growth in global innovator services   64 Raising the potential to compete in international markets   67 CHAPTER 5 Improving the Growth Prospects of Low-skilled Services     71 The potential to improve the productivity of jobs   72 Export-led growth in tourism-related services   73 The use of technologies in low-skilled (non-tradable) consumer services   76 CHAPTER 6 Key Recommendations    80 References    83 ANNEX FOR CHAPTER 1:  Decomposition Methodology    85 BOXES B1.3.3  Emigration rates are higher for low- skilled men than women   25 1.1  Methodology for classifying services   22 1.9  Uzbekistan’s services sector is dominated 1.2  Modes of services trade   23 by low-skilled services as well as social services — with little prominence of global 1.3  Migration and trade in services   24 innovator services — which is consistent with its 2.1  Measuring restrictions to services trade   34 level of per capita income   26 2.2  Economic gains from reducing restrictions 1.10  Within the services sector, female on services trade   36 employment is mostly in social services and 2.3  Leveraging Uzbekistan’s WTO accession lower skilled services   27 process to reduce services trade restrictions   39 1.11  Global innovator services are both the 3.1  Financial services in Uzbekistan   51 most productive services as well as the biggest 4.1  Case studies of reforms driving growth in drivers of productivity growth   28 services   65 2.1  Compared to global comparator countries, Uzbekistan underperforms on the policy dimensions of connectivity, capabilities, and contestability   32 FIGURES 2.2  Trade in services is characterized by major restrictions in most sectors, with some sectors 1.1  Uzbekistan has sustained high rates of virtually closed to competition   33 economic growth since 2017   17 2.3  There are many businesses with state 1.2  The services sector has been central to ownership in the services sector, including in growth in overall employment and value added   18 subsectors where private provision can be 1.3  The services sector is an important source effective   35 of jobs for women in Uzbekistan   19 2.4  Services restrictions correspond to tariff 1.4  The services sector has been a source of equivalents of more than 25 percent for mode productivity growth, but a large gap remains 1 trade and more than 15 percent for mode 3 with the global frontier   20 trade   35 1.5  Uzbekistan’s services trade growth has 2.5  Liberalizing barriers to services trade in been slower than goods trade, which is at odds Uzbekistan is expected to increase GDP, trade with global trends   20 and investment.   36 1.6  FDI inflows have been lower than in some 2.6  There are large impacts of services comparator countries, but the services sector liberalization across all sectors, also outside of in Uzbekistan is increasingly a destination of FDI   21 services.   37 1.7  Services subsectors differ by the degree to 2.7  Liberalizing services is expected to which they rely on skills, provide inputs to other increase incomes of both unskilled and skilled sectors, and are traded internationally, and they workers   38 can be grouped into four categories   22 2.8  There are large gains in output and wages 1.8  Commercial presence (FDI) is the main of liberalizing barriers to services trade in mode through which services are imported, Uzbekistan   38 while cross-border supply is the main mode 2.9  Uzbekistan has the highest trade costs through which services are exported in compared to its regional peers and these have Uzbekistan   24 increased over the past two decades   40 B1.3.1  Emigration rates for high-skilled 2.10  Uzbekistan has experienced a decline in its individuals are higher than for low-skilled logistics performance since 2018 with regard to individuals, especially among women   25 infrastructure, tracking, tracing, and timeliness   41 B1.3.2  Emigration rates are higher for high- 2.11  Uzbekistan’s overall logistics performance skilled women than men   25 score lags regional comparators   41 2.12  The quality of Uzbekistan’s broadband 3.10  Road transportation is the most important connectivity continues to lag comparator mode of transport by weight, while pipeline and countries   42 rail transportation are important modes when 2.13  Prices of mobile broadband are lower than looking at ton-kilometers   57 before, but affordability remains low compared 3.11  Postal services underperform compared to some peer countries and advanced to comparator peer countries   58 economies   43 3.12  The transportation sector faces major 2.14  Uzbekistan’s emphasis on advanced, restrictions when it comes to trade technical education is developing a relevant skill in services   59 base but this needs to be expanded   44 3.13  Air connectivity has grown in terms of 2.15  There is a positive relationship between frequency, cargo capacity, number of carriers, the adoption of structured management and the amount of city pairs covered   61 practices and labor productivity in the services 4.1  Uzbekistan’s exports of global innovator sectors, but adoption is low   45 services have accelerated in the past decade, 3.1  Most services are produced for domestic but they account for a tiny fraction of total consumption   49 services exports   64 3.3  Many services jobs support exports 4.2  Average wages in global innovator services through other sectors rather than direct exceed those in manufacturing and this gap has exports   49 widened in recent years   65 3.2  Manufacturing sectors rely very little on 4.3  Wage costs among global innovator services as inputs for the production process   49 services in Uzbekistan are comparable to India 3.4  Exports by most sectors depend on and the Philippines    66 services jobs through linkages   50 4.4  Inadequate worker skills are not a major 3.5  The most prominent manufacturing constraint for businesses in Uzbekistan   67 sectors are less dependent on services   51 4.5  Global innovator services are B3.1.1  Financial services only provide 0.5 characterized by higher levels of digital percent of employment, but contribute to 2.8 intensity   68 percent of GDP   52 4.6  Global innovator services are highly B3.1.2  Roughly 16 percent of firms report that restricted on cross-border delivery   69 they are fully credit constrained, higher than 5.1  The gap in labor productivity between the average for Europe and Central Asia   52 Uzbekistan and Russia was the highest among B3.1.3  Restrictions to trade in financial services low-skilled consumer services, including remain high, especially for cross-border supply hospitality and retail   72 of services   52 5.2  Tourism-related transportation and B3.1.4  The use of digital technologies for making hospitality services are central to Uzbekistan’s payments is low in Uzbekistan compared to services exports   73 comparator countries   52 5.3  Slow growth in exports of travel-related 3.6  Trade in mobile and fixed-line services tracks the slow growth in the arrival of telecommunications is characterized by major tourists from abroad   74 restrictions   53 5.4  The number of passengers carried by air 3.7  Regulatory quality in the ICT sector is low transportation services relative to the size of compared to other countries, including in the the economy declined in Uzbekistan unlike in region   54 other developing economies in the region   74 3.8  Uzbekistan has been lagging with respect to 5.5  Among hospitality services, there are few the adoption of mobile technologies   55 trade restrictions on accommodation services, 3.9  The uptake of mobile services and fixed-line but the opposite is true for the services of tour services such as broadband remains low   56 operators, agents, and guides   75 5.6  Restrictions on foreign direct investment TABLES in retail services in Uzbekistan are low even compared with high-income countries in the ES.1  Policy recommendations along the region   76 dimensions of capabilities, connectivity, and 5.7  Uzbekistan’s secondary school enrolment contestability   15 rates are near universal but digital literacy is far from complete   77 2.1  Policy priorities for the three growth 5.8  The use of basic digital technologies is more pathways   46 widespread in certain business functions   78 6.1  Policy recommendation along the 5.9  Access to mobile internet is relatively low, dimensions of capabilities, connectivity, and especially in rural areas   79 contestability   82 8 Acknowledgements This report was written by a team led by Henry Aviomoh (Economist, Task Team Leader), Elwyn Davies (Senior Economist, Task Team Leader), and Gaurav Nayyar (Lead Economist, Task Team Leader) under the guidance of Tatiana Proskuryakova (Country Director), Antonio Nucifora (Practice Manager), Marco Mantovanelli (Country Manager), and David Knight (Lead Country Economist and Program Leader). Mona Haddad (Global Director), Ilias Skamnelos (Practice Manager) and Asya Akhlaque (Practice Manager) provided further guidance. The team included Umida Haqnazar (review of relevant laws and legislations), José Signoret (CGE modelling), Roberto Echandi and Prakhar Bhardwaj (analysis of services trade restrictions), Christina Wiederer and Daria Ulybina (logistics performance), as well as Mariana Iootty, Eskender Trushin, and Pinar Yasar (for their inputs from the Country Economic Memorandum). In addition, we would like to thank Stefan Apfalter, Victor Aragones, Yeraly Beksultan, Mansur Bustoni, Urvashi Narain, Daniel Saslavsky, and Ikuko Uochi for providing further inputs and comments. Design and typesetting was conducted by Piotr Ruczyński. We thank the peer reviewers — Valerie Mercer-Blackman, Habib Rab, and Pierre Sauvé — for their comments and suggestions. Funding from the Competitiveness for Jobs and Economic Transformation (C-JET) trust fund is gratefully acknowledged. 9 Abbreviations AVE ad valorem equivalent CGE computable general equilibrium FDI foreign direct investment GATS General Agreement on Trade in Services ICT Information and Communications Technology IT Information Technology ITU International Telecommunications Union LPI logistics performance index OECD Organisation for Economic Co-operation and Development SOE state-owned enterprise STRI services trade restrictiveness index WTO World Trade Organization 10 T I V E C U EXE ARY M M SU The services sector has been central to structural transformation in Uzbekistan In Uzbekistan, the services sector accounts for more than half of all jobs and it has been central to the process of structural transformation over the past three decades. The services sector’s share of total employment in Uzbekistan increased from 37 percent to 50 percent between 1991 and 2022, offsetting almost the entire decline in the agricul- ture sector’s share. Similarly, the services sector’s share of value-added rose from 35 per- cent to 44 percent over the same period, offsetting a substantial decline in the share of agriculture together with a smaller decline in the share of industry. However, in the last decade, while the services sector has continued to grow in terms of share in value added, its share in employment remained stagnant. As a corollary, labor productivity growth in the services sector between 2011 and 2021 exceeded that in both industry and agricul- ture, reversing a trend from previous decades when productivity growth was lower. Yet, large gaps in labor productivity growth in the services sector remain when compared to advanced economies. In the past decade, the growth of Uzbekistan’s services exports has lagged behind its manufactures' exports while FDI greenfield announcements to both sectors have been even. While growth in world commercial services trade exceeded growth in world goods trade between 2005 and 2021, the reverse is true for Uzbekistan. As a result, Uzbekistan has so far benefited less from the growth in services trade although its commercial ser- vices trade growth outpaced that of some regional peers. FDI flows to the services sec- tor are increasing, as evidenced by a growing trend of greenfield announcements, which matched those in the manufacturing sector between 2020 and 2023. The growth of the services sector in the past five years was driven by social services, mostly reflecting increased public spending. This report groups the services sector into four groups based on their skill intensity, the extent of their linkages with other sectors, and their tradability in international markets: low-skilled consumer services (e.g., retail, hospitality, administrative and support, and personal services), low-skilled enabling ser- vices (transportation, wholesale, and telecommunications), global innovator services (ICT, professional, and financial services) and social services (education, health, and public ad- ministration). Of these groups, social services accounted for three-fourths of employment growth in the services sector between 2017 – 2022. These services also experienced rela- tively high rates of labor productivity growth, which was largely driven by higher public spending on wages and salaries. Executive Summary 11 Global innovator services are more productive but they employ few people while low- skilled services, including those which provide inputs to other sectors, have experi- enced little productivity growth. Global innovator (ICT, professional, and financial) ser- vices — that are relatively skill-intensive, share greater linkages with other sectors, and are more traded internationally — have the highest levels of labor productivity (with ICT and financial services being more than 2.5 times as productive as manufacturing) as well as high levels of labor productivity growth (with ICT, professional, and financial services growing by 15, 10, and 8 percent annually, respectively, between 2017 – 2022). However, global innovator services account for only about 4 percent of total services employment. In contrast, low-to-medium skilled services, including retail, hospitality, transportation, and telecommunications, account for almost 60 percent of total services employment in Uzbekistan but have experienced little productivity growth. Of these, transportation and telecommunications services are important enablers for economic activity in other sectors of the economy. The promise of private sector-led services growth can be leveraged by strengthening linkages with other sectors, expanding the share of global innovator services, and im- proving the productivity of low-skilled services, with the first channel providing max- imum economy-wide benefits. The linkages between the services sector and the rest of the economy, especially the manufacturing sector, are weak. About 50 percent of the val- ue of services output constitutes inputs to other economic activities, and services account for less than 10 percent of the inputs used in the manufacturing sector. Global innovator services account for less than 10 percent of total services exports in Uzbekistan. While this broadly conforms to the average for its level of per capita income, the corresponding shares are higher for countries, such as India, that have attained success at lower levels of per capita income. Expanding export-led employment in these services — where work- ers earn more than double than that in low-skilled services — has the potential to shift employment into better-paying jobs. There is also considerable scope to raise productiv- ity in low-skilled services — relative to advanced economies — that account for around two-thirds of services employment. A policy agenda for services: connectivity, contestability and capabilities (3Cs) Uzbekistan can address these challenges and leverage the services sector to deliver growth and jobs through progress along three areas of policy action: connectivity, con- testability, and capabilities (3Cs). Uzbekistan’s physical connectivity to markets is hin- dered by the relative inefficiency of its logistics performance. Uzbekistan ranked 88 out of 139 economies globally in the World Bank’s 2023 Logistics Performance Index (LPI). It lags comparator countries, such as Georgia or Kazakhstan, in the overall logistics perfor- mance as well as in its tracking and timeliness components where its score has declined since 2018. On digital connectivity, in 2022, the share of individuals using the internet in Uzbekistan was roughly 83.1 percent, which is below the regional average of 86.1 per- cent and lower when compared to regional comparators such as Kazakhstan and Russia (which are above 90 percent). Furthermore, internet prices and internet speeds remain well below global frontier countries but also below most peer countries. The contestabil- ity of markets is limited by a range of trade restrictions across the services sector. The average Services Trade Restrictiveness Index (STRI) score for Uzbekistan is particularly high for cross-border supply, i.e., mode 1 trade (80.3 compared to 47.3 and 36.5, respectively, for modes 3 and 4), and higher than the corresponding scores for comparator countries such as Kazakhstan, Colombia, Peru, and Viet Nam. Cross-border supply is prohibited in 11 out of 31 sub-sectors in Uzbekistan. The monopoly of state-owned enterprises in many Executive Summary 12 services sectors, such as air and rail transportation, also poses challenges for market com- petition . Uzbekistan’s emphasis on advanced, technical education and on the English lan- guage is developing a relevant skill base but this needs to be expanded. In 2022, tertiary enrolment rates in Uzbekistan — at 31.5 percent — were below the regional average of 80 percent and below those of its main regional comparators — Kazakhstan (64 percent) and Russia (83 percent). The expansion of global innovator services will require coordinated progress along con- nectivity, contestability, and capabilities where the establishment of Tashkent’s IT Park marks a beginning. Digital connectivity is a prerequisite for the cross-border delivery of ICT and professional services. So too are the capabilities of workers to match skill require- ments and contestability that provides competition to domestic service providers. Global innovator services depend disproportionately more on digital connectivity because they use a higher share of ICT inputs. The speed and quality of broadband internet in Uzbekistan stands well below peer countries, which is particularly detrimental to digital-intensive professional and ICT services. On contestability, Uzbekistan is completely closed to the cross-border delivery of several professional services and highly restricted on the cross-bor- der delivery of ICT services, which is largely indicative of data localization requirements. On capabilities, the share of university graduates with STEM-related degrees exceeds that in peer countries. However, the share of the population with standard ICT skills is about 8.5 percent in Uzbekistan, which is lower compared to regional peers such as Kazakhstan (24 percent) and Russia (16 percent). The recently established IT Park in Tashkent — with world class internet connectivity, tax-free access to imported ICT hardware and software, and a digital IT university — illustrates coordinated progress along the 3Cs. Connectivity is a pre-requisite for strengthening linkages between the services sec- tor and the rest of the economy, and greater contestability will improve the returns to these linkages. The infrastructure and services associated with transportation and tele- communications facilitate the physical and digital connectivity that can strengthen link- ages between services and other sectors of the economy. These linkages mean that greater contestability in the services that provide inputs to other sectors in the economy, including manufacturing, has cascading productivity benefits. In the case of telecommunications, a large role of the state and onerous regulations limit competition in the sector, increase prices, and slow down the adoption of faster network technologies. In the case of trans- portation, licensing requirements, quotas, the presence of state monopolies, and restric- tions to obtaining land limit the availability of transportation suppliers and increases the cost of transport. Services liberalization can greatly benefit downstream sectors, includ- ing manufacturing, with an estimated expansion of 16 percent in terms of output. Output in manufacturing sub-sectors such as pharmaceuticals, electronics, and machinery that require substantial intermediate inputs from the services sector is estimated to expand by 24, 30, and 23 percent, respectively. Capabilities matter less here owing to low to inter- mediate skill requirements. Better connectivity can improve the productivity of low-skilled services, while capa- bilities and contestability have a less prominent role. For improving the productivity of low-skilled consumer services, advanced capabilities again matter less and Uzbekistan’s near universal secondary school completion is largely sufficient. Contestability also mat- ters less — because there are relatively few trade restrictions, such as in hospitality and retail services. Connectivity is therefore centerstage. While travel-related transporta- tion and hospitality services currently account for more than three-fourths of Uzbeki- stan’s services exports, growth in exports of travel-related services has been slow — even relative to other Central Asian countries — despite lower restrictions on the entry of for- eign visitors. This reflects gaps in infrastructure investment that constrain passenger Executive Summary 13 transportation in Uzbekistan. The lack of connectivity also reflects low contestability, such as in air transportation services where the state-owned Uzbekistan Airways has a dominant position. Among non-tradable services such as retail, technology can drive pro- ductivity gains, but the lack of digital connectivity stands out; the share of firms in low- skilled services that use a website to communicate or transact with customers is around only 20 percent in Uzbekistan. On capabilities, the pool of skilled workers can be expanded through vocational train- ing and fewer restrictions on migrants from abroad, even as the scale of advanced ed- ucation increases over time. Uzbekistan’s emphasis on advanced, technical education is developing a relevant skill base but this needs to be expanded. Investments in higher ed- ucation that increase tertiary enrolment rates can enable a sizable pool of skilled work- ers. At the same time, vocational training can accelerate the development of advanced ICT skills, such as through the Government of Uzbekistan’s “One Million Uzbek Coders” train- ing program. Fewer restrictions on mode 4 trade for highly skilled workers from abroad can also ease the skill gap. In Tashkent’s IT Park, IT specialists and start-up founders are eligible for visas which are valid for up to three years. The movement of skilled persons from abroad can also facilitate the adoption of structured managerial practices among firms in Uzbekistan which is low compared to peer countries. On connectivity, investments in physical and digital infrastructure need to be scaled up, even as reforms that simplify logistics procedures and expand private sector par- ticipation can deliver benefits. Investments in infrastructure across different modes of transportation — such as through the construction of new roads, railway lines, and air- ports — are especially important to bolster physical connectivity in “double landlocked” Uzbekistan. Similarly, investments are needed to improve the quality of broadband con- nectivity through more widespread coverage of faster forms of mobile internet, such as 4G/LTE. Regulatory reforms can also boost connectivity. Alongside further improvements in its customs procedures, Uzbekistan can particularly benefit from procedures that im- prove the tracking and tracing of consignments as well as the timeliness of shipments reaching their destination. Reforms that bolster private sector participation in transpor- tation services, such as air travel, can also improve connectivity. Further, reforms that boost market contestability in telecommunication and transportation services can im- prove connectivity. These are discussed below. On contestability, reducing prohibitive trade restrictions on the cross-border delivery of global innovator services and introducing competition to state-owned businesses in telecommunication and transportation services are key. Liberalizing restrictions on the cross-border delivery of several professional and ICT services — some of which are completely closed to mode 1 trade — can boost competition and enable the flow of com- mercial data that is becoming central to global production processes. Reforms that in- troduce market competition by reducing the role of state-owned enterprises (SOEs) in services sectors that provide important economy-wide inputs can also raise productivi- ty. In telecommunication services, removing the international gateway monopoly of Uz- telecom by encouraging entry of other companies is a case in point. In transportation ser- vices, rethinking the privileges afforded to JSC Uzbekistan Airways can increase competi- tion on air travel routes. The same holds true for the national monopoly in rail services to increase competition in freight markets. Reducing restrictions on foreign direct invest- ment in telecommunication and transportation services sector will be an important part of the sector’s liberalization. Executive Summary 14 The pursuit of regulatory reforms in the services sector can deliver large economic gains Regulatory reforms that improve contestability in the services sector will boost val- ue added in the sector while also increasing real GDP and wages at the aggregate level. It is estimated that Uzbekistan could expand by as much as 9 percent in terms of real GDP if restrictions on services trade are reformed to eliminate the most restrictive barriers and close the gap with the best performer by 50 percent (partial liberalization). Reforms to reduce restrictions on services trade that entirely close the gap with the best perform- er (full liberalization) could even result in a 17 percent increase in real GDP. All sectors of the economy can benefit from an opening of services trade. Services and manufacturing would expand in the range of 8 to 9 percent, respectively, with a partial liberalization of services restrictions and by close to 19 and 15 percent, respectively, if a full liberalization is simulated. The largest expansion will feature across the global innovator services — fi- nance, communication, and insurance will expand by 23, 39, and 45 percent respectively. Furthermore, greater contestability in the services sector would increase real income by about 8 percent in a partial liberalization scenario and by 16 percent in a full liberaliza- tion scenario with wages of both skilled and unskilled workers increasing. Most of these gains are attributable to reducing restrictions on the cross-border delivery of services, i.e., mode 1 services trade. Uzbekistan’s prospective accession to the World Trade Organization (WTO) provides an important entry point for the liberalization of the services sector. The experience gained from the WTO accession of other transition economies strongly suggests that the policies and market structures that underpin prevailing Uzbek restrictions in services will come under considerable scrutiny as the country pursues its WTO accession. The success of its accession journey, and the likelihood of its completion within the next two years, may well hinge on the willingness and ability of Uzbek policy makers to embrace a sequence of reforms aimed at boosting the contestability of the country’s service economy. Doing so would also address prevailing hurdles to connectivity, both physical and digital, while also helping attract the larger doses of foreign capital (via mode 3 commitments on FDI), tech- nologies, and talents (via mode 4 commitments on intra-corporate transferees and special- ists) that the shift towards modern innovator services will require. Beyond aiming for an ambitious set of sector and mode-specific commitments under the General Agreement on Trade in Services (GATS), Uzbekistan can leverage its WTO accession by advancing reforms in a host of complimentary areas, such as through plurilateral agreements on services domestic regulation, government procurement, and information technology. Policy actions that improve capabilities, connectivity, and contestability (see Table ES.1) are consistent with the Government of Uzbekistan’s stated objectives of leveraging the services sector as an engine of economic growth. This is reflected in the provisions list- ed under Decree of the President of the Republic of Uzbekistan, dated 11 September 2023, on the “Uzbekistan 2030” Strategy. On capabilities, the stated objectives include, “provid- ing modern knowledge and skills through the development of vocational education sys- tem” and “increasing enrollment in higher education and improving the quality of train- ing specialists with higher education”. On contestability, the stated objectives include “implementing consistent transition of monopolistic sectors to market principles, increas- ing the private sector share in the economy, and creating the most favorable conditions for free activities of entrepreneurs”. On connectivity, the stated objectives include “provid- ing stable and long-term sources of financing to infrastructure projects”. Executive Summary 15 TABLE ES.1  Policy recommendations along the dimensions of capabilities, connectivity, and contestability Objective Policy recommendations Priority Strengthen Capabilities Medium linkages between • Investments in secondary education to emphasize socioemotional and interpersonal skills in enabling services school curricula. and other sectors • Vocational training for standard IT skills. Key sectors: • Align standards more closely with international standards to encourage more entry of foreign Transporta- businesses outside the immediate region. tion and logistics, telecommunications Connectivity High • Investments in infrastructure to bolster transportation and digital connectivity. (SEE CHAPTER 3) • Regulatory reforms to improve customs procedures, the tracking and tracing of consignments, as well as the timeliness of shipments reaching their destination. Reforms that bolster private participation in transportation and telecommunication services can also improve connectivity. Contestability High Telecom: • Remove the international gateway monopoly of Uztelecom; provide more competitive wholesale prices. • Establish an independent regulator. • Facilitate licensing arrangements for providers, including moving to a notification procedure rather than the current approval procedure. Transportation: • Air: Increase competition of routes through gradual liberalization of the sector; rethink privileges afforded to JSC Uzbekistan Airways. • Road: Re-assess quota system; facilitate operations of foreign transportation providers. • Rail: Complete the unbundling of track infrastructure and passenger and freight service provision; increase competition on freight markets, starting with reducing the influence of the “master” freight forwarders. • Warehousing: Expand opportunities for private sector firms to establish warehouses and logistics centers, including facilitating the establishment of warehouses near transportation hubs. Expand the Capabilities High footprint of • Investments in higher education that increase tertiary enrolment rates can enable a sizable pool global innovator of skilled workers over the medium term. services • Vocational training to accelerate the development of advanced ICT skills, such as through the Key sectors: Government of Uzbekistan’s “One Million Uzbek Coders” training programas well as fewer IT, professional restrictions on work visas for highly skilled workers from abroad, such as in Tashkent’s IT Park. services, financial services Connectivity High • Investments to improve the quality of broadband connectivity through more widespread (SEE CHAPTER 4) coverage of faster forms of mobile internet, such as 4G/LTE. Contestability High • Reduce restrictions on cross-border delivery through relaxing data localization requirements, while striking a balance with privacy considerations. Increase the Capabilities Medium productivity • Investments in secondary education to emphasize socioemotional and interpersonal skills in of low-skilled school curricula. services • Vocational training for standard IT skills. Key sectors: Retail, hospitality, Connectivity High personal services • Investments to improve access to broadband connectivity in more remote areas. (SEE CHAPTER 5) Contestability Medium • Simplify the process to obtain land leases and reduce restrictions on land ownership. Source: World Bank, based on findings in this report. ER 1 PT CHA THE SERVICES SECTOR AND STRUCTURAL TRANSFORMATION Chapter 1  The Services Sector and Structural Transformation 17 The economic transformation resulting from Uzbekistan’s transition to a market-based economy remains incomplete. The reforms launched by the government in 2016 provided an impetus to Uzbekistan’s rate of economic growth, which averaged 5.2 percent per an- num in the past six years (2017 – 2022). This exceeded the average for countries in Eastern Europe and Central Asia as well as for lower middle-income and upper middle-income counties (figure 1.1). However, employment growth in the past six years averaged only 0.5 percent per annum. This creates challenges for employment participation rates, especial- ly given that growth in the working-age population averaged around 1.4 percent during the same period. Therefore, there is a need for policies that enable productivity-enhanc- ing structural transformation to generate more and better jobs. FIGURE 1.1  Uzbekistan has sustained high rates of economic growth since 2017 Growth of GDP and GDP per capita, 2017 – 2022 World ECA LMIC UMIC UZB 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 Real percent GDP growth GDP per capita growth Source: World Bank 2024, Uzbekistan Country Economic Memorandum, based on World Development Indicators (WDI). Note: ECA = Europe & Central Asia, excluding high income countries; LMIC/UMIC = Lower/upper middle-income country. THE CONTRIBUTION OF THE SERVICES SECTOR TO GROWTH AND JOBS The services sector has been central to the process of structural transformation in Uz- bekistan in the past three decades. Between 1991 and 2022, the services sector’s share of total employment increased from 37 to 50 percent, offsetting almost the entire decline in the agriculture sector’s share, with little change in the share of industry (figure 1.2, pan- el a). Similarly, the services sector’s share of value-added rose from 35 percent to 46 per- cent, offsetting a substantial decline in the share of agriculture together with a smaller decline in the share of industry (figure 1.2, panel b). The rising shares of the services sec- tor in employment and GDP reflect its central role in driving economic growth in Uzbeki- stan. Over the past three decades the services sector accounted for more than half of both employment growth (figure 1.2, panel c) and value-added growth (figure 1.2, panel d) be- tween 1991 and 2021. This pattern of structural transformation where the services sec- tor has offset much of the decline in the share of the agriculture sector in both value add- ed and employment was experienced — on average — across developing countries in the past decade (Nayyar, Hallward-Driemeier, and Davies 2021). In the last decade, the services sector continued to grow in terms of value added, but employment shares remained stagnant. The contribution of the services sector to val- ue added has increased from 42.9 percent to 46.2 percent between 2011 and 2022. The Chapter 1  The Services Sector and Structural Transformation 18 industrial sector saw a similar growth (from 23.9 percent to 26.5 percent), while the share of the agricultural sector declined. As a result of this, services were the largest contrib- utor to value added growth in the last decade (figure 1.2, panel d). However, structural transformation in terms of employment changes was more limited. The share of the ser- vices sector remained at around 50 percent between 2011 and 2021. As a result, the con- tribution of the services sector to aggregate employment changes was close to zero (fig- ure 1.2, panel c). The share of agriculture in total employment was also largely stagnant over the past decade, while the share of industry increased marginally. FIGURE 1.2  The services sector has been central to growth in overall employment and value added a. Share of employment, 1991 – 2022 b. Share of value added, 1991 – 2022 60 60 50 50 40 40 Percent 30 Percent 30 20 20 10 10 0 0 19 1 93 95 97 99 20 1 03 20 5 20 7 09 20 1 13 15 17 19 21 19 1 93 95 97 99 20 1 03 20 5 20 7 09 20 1 13 15 17 19 21 9 0 1 9 0 1 20 20 0 0 0 0 20 20 20 20 20 20 19 20 19 20 20 20 19 19 19 19 20 20 19 19 Agriculture Industry Services Agriculture Industry Services c. Sectoral decomposition of employment changes, 1991 – 2021 d. Sectoral contributions to value added, 1991 – 2021 ECA ECA LMIC LMIC IND 2011–2021 IND 2011–2021 RUS RUS KAZ KAZ UZB UZB _ ECA _ ECA _ LMIC _ LMIC _ IND _ IND 1991–2021 1991–2021 _ RUS _ RUS _ KAZ _ KAZ _ UZB _ UZB −1.5 −1.0 −0.5 0 0.0 0.5 1.0 1.5 0 1 2 3 4 5 6 7 Percentage points Percentage points Agriculture Industry Services Agriculture Industry Services Source: Calculations based on World Bank WDI. Notes: Decomposition is based on Shapley method. ECA refers to Europe and Central Asia, excluding high income countries. The services sector has accounted for much of the growth in female employment, and the decline in female labor force participation in the past decade coincides with the sector’s stagnation. The services sector has been the major contributor to aggregate fe- male employment growth in the past three decades; the contribution of agriculture and Chapter 1  The Services Sector and Structural Transformation 19 manufacturing was negative during the same period (figure 1.3, panel a). The female la- bor force participation rate declined from 45 percent to 40 percent between 1991 and 2021. The share of women employed in agriculture and industry also declined during this peri- od. The share of women employed in the services sector increased from 44 to 60 percent between 1991 and 2010 but largely stagnated thereafter (figure 1.3, panel b). In the past decade, the declining labor force participation rate of women is a consequence of the ser- vices sector being unable to absorb the declining shares of female employment in other sectors in the economy. FIGURE 1.3  The services sector is an important source of jobs for women in Uzbekistan a. Labor force participation of women and sectoral shares of b. Decomposition of the change in employment of women for employment of women Uzbekistan 70 3 60 2 50 40 Percent 1 Percent 30 20 0 10 0 −1 19 1 93 95 97 99 20 1 03 20 5 20 7 09 20 1 13 15 17 19 21 9 0 1 20 0 0 20 20 20 19 20 20 19 19 20 19 −2 1991–2021 1991–2000 2001–2010 2011–2021 Agriculture Industry Services Female Labor Participation Rate Agriculture Industry Services Source: Authors’ calculations based on World Bank WDI. Notes: Decomposition is based on Shapley method. Labor productivity growth in services matched or exceeded that of other sectors, but large gaps with advanced economies remain. Between 2011 and 2021, labor productiv- ity growth (measured by value added per worker) in the services sector exceeded that in both industry and agriculture, reversing a trend from previous decades when productivity growth was lower (figure 1.4, panel a). As a result, the services sector has been the largest contributor to overall labor productivity growth. However, as employment shares in ser- vices sectors changed little, most of this contribution was due to “within-sector” produc- tivity growth and not due to sectoral reallocations (figure 1.4, panel b). Nevertheless, dif- ferences in labor productivity in the services sector between Uzbekistan and the average for Organisation for Economic Co-operation and Development (OECD) countries remain large. Between 2011 and 2021, the labor productivity of the services sector in Uzbekistan was 14 times lower than that of OECD countries, four times lower than in Kazakhstan, three times lower than in Russia, and two times lower than in Georgia (figure 1.4, panel c). In the past decade, Uzbekistan’s services exports have grown slower than its manufac- tures exports, although world services exports have grown faster than goods exports over the same period. Uzbekistan, for example, has so far benefited less from the growth in services trade. While growth in world commercial services trade exceeded growth in world goods trade between 2005 and 2021, the reverse is true for Uzbekistan (figure 1.5, panel a), although its commercial services trade growth outpaced that in some regional peer countries (figure 1.5, panel b). Chapter 1  The Services Sector and Structural Transformation 20 FIGURE 1.4  The services sector has been a source of productivity growth, but a large gap remains with the global frontier a. Sectoral average labor productivity growth c. Labor productivity gaps, 2011 – 2021, relative to OECD countries (=100 percent) Agriculture OECD ECA Members Industry Services GEO −4 −2 0 2 4 6 8 IND Percent 1990–999 2000–2010 2011–2021 KAZ Source: Authors’ calculations based on World Bank WDI. Notes: Labor productivity is estimated as value added per worker. Growth LMIC rates are average annual growth rates. PHL b. Annualized growth in value added per worker 1991–2000 RUS Agriculture 2001–2010 2011–2021 UMIC _ 1991–2000 Industry _ 2001–2010 _ 2011–2021 UZB __ 1991–2000 Services __ 2001–2010 VNM __ 2011–2021 −2 −1 0 1 2 3 0 20 40 60 80 100 Percent Percent Within-Sector Across-Sector Dynamic Agriculture Industry Services Source: Calculations based on World Bank WDI. Source: Calculations based on World Bank WDI. Notes: Decomposition is based on de Vries et al. (2015). See appendix for Notes: Productivity decomposition is based on de Vries et al. (2015). See appen- Equations. dix for ECA refers to Europe and Central Asia excluding high income countries. FIGURE 1.5  Uzbekistan’s services trade growth has been slower than goods trade, which is at odds with global trends a. Total trade volume, 2005 – 2022 (2005 = 100) b. Total trade volume, 2005 – 2022 (2005=100) 600 700 500 600 500 400 Percent Percent 400 300 300 200 200 100 100 05 07 09 11 13 15 17 19 21 05 07 09 11 13 15 17 19 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 World Commercial World Goods ARM AZE GEO KAZ KGZ Uzbekistan Commercial Uzbekistan Goods LMC RUS TJK UMC UZB Source: Calculations based on World Bank WDI. Notes: Total trade volume is the sum of total exports and imports. Commercial services exclude government services not included elsewhere. Chapter 1  The Services Sector and Structural Transformation 21 Foreign direct investment (FDI) inflows to the services sector have increased over the past decade, although there is ample scope for overall flows to increase further. Net inflows of FDI corresponded to 2.9 percent of GDP between 2017 and 2022, which is higher than the regional average for Europe and Central Asia (1.5 percent) and countries like Peru, Kazakhstan, and Armenia (see figure 1.6, panel a). They are nevertheless lower than in coun- tries like Viet Nam (4.7 percent), Colombia (3.8 percent), and Malaysia (2.9). Data on FDI green- field announcements suggest an upward trend of foreign investment into the services sector. Between 2020 and 2023, announced investments into services were at a similar level as the manufacturing sector, which faced a decline compared to earlier years (see figure 1.6, panel b). However, there is scope to increase FDI flows in services — which remain at low levels com- pared to FDI into utility sectors (electricity, gas, and water supply) — and to increase overall FDI. FIGURE 1.6  FDI inflows have been lower than in some comparator countries, but the services sector in Uzbekistan is increasingly a destination of FDI a. FDI inflows, average 2017 – 2022 b. FDI announcements in Uzbekistan, by sector Vietnam Manufacturing Colombia Services Malaysia Utilities Uzbekistan Peru Other Kazakhstan 0 5,000 10,000 15,000 Armenia US$, millions ECA 2012–2015 2016–2019 2020–2023 0 1 2 3 4 5 Source: Authors’ calculations based on fDi Markets (Financial Times). Percentage of GDP Notes: This data is based on FDI announcements captured in the fDi Markets database. Not all announcements necessarily materialize and not all material- Source: Uzbekistan Country Economic Memorandum (forthcoming) based on ized FDI is captured in this dataset. Investment amounts include estimated val- World Bank WDI. ues. “Other” includes agriculture, mining, and construction. INSIDE THE BLACK BOX OF THE SERVICES SECTOR The services sector is a diverse set of economic activities — varying in skills, linkages with other sectors, and trade in international markets — with differences in their po- tential to deliver scale, innovation, and spillovers. The services sector comprises many economic activities, which differ in their skill intensity, the extent to which they are in- ternationally traded, and the magnitude of their linkages with other sectors. These char- acteristics, respectively, create opportunities for innovation, scale economies, and spill- overs that result in productivity gains.1 This report classifies the services sector in four groups (see Box 1.1): global innovator services that are skill-intensive and enable other sectors through linkages (e.g. IT, professional, technical, and financial services); low-skilled enabling services that are less skill-intensive but highly linked to other sectors (e.g., transportation, 1 Conventional wisdom was pessimistic because labor productivity in the services sector could not be read- ily increased, either through innovation and capital accumulation, owing to the “intrinsic role of labor,” or through economies of scale because the intensity of face-to-face interactions constrained service providers from reaching consumers beyond the local market (Baumol 1967). Chapter 1  The Services Sector and Structural Transformation 22 telecommunications, support services, and wholesale); low-skilled consumer services that are less skill-intensive and mostly sell to final consumers (e.g. retail, hospitality, and personal services); and finally, social services that are mostly delivered by the public sector (e.g. health and education). Furthermore, global innovator services are highly traded internationally. Among low-skilled enabling services and low-skilled consumer services, transportation, and hospitality, respectively, are highly traded internationally. Figure 1.7 classifies differ- ent services subsectors in Uzbekistan based on their linkages with other sectors (on the horizontal axis), their skill intensity (vertical axis) as well as their tradability (coloring). FIGURE 1.7  Services subsectors differ by the degree to which they rely on skills, provide inputs to other sectors, and are traded internationally, and they can be grouped into four categories Classification of services in Uzbekistan, by skill intensity, linkages, trade, and employment (2018) 70 60 Financial Education 50 Skill intensity, percent Public administration 40 ICT Professional & technical 30 Health Social services Global innovator services 20 Low-skilled consumer services Low-skilled enablers 10 Other services Hospitality Retail Admin/support Wholesale Transport 0 0 10 20 30 40 50 60 70 80 90 100 Share intermediate consumption, percent Export-oriented sectors (if more than 5 percent of output is exported) Source: Authors’ calculations based on ILOSTAT and Uzbekistan Input-Output Tables (prepared by the Statistics Agency under the President of the Republic of Uz- bekistan). Notes: Share of intermediate consumption is determined by the share of output for the domestic market that is sold to sectors (excluding gross capital forma- tion). Skill intensity is the share of workers with tertiary education. Skill intensity for IT (which is not available in the data) has been assumed to be equal to finan- cial services (in line with evidence from other countries).The size of the bubbles corresponds to employment levels in 2018. No separate employment data is avail- able for retail and wholesale sectors or for non-ICT or ICT sectors and values have been estimated using output data. BOX 1.1  Methodology for classifying services This report classifies the services sector into four groups, based more traded internationally. Of the different modes through on their skill intensity, their linkages with other sectors, and the ex- which services can be traded, “cross-border supply” (mode tent that they are traded. These characteristics, which enable scale 1) is the most prominent mode of trade accounting for more economies, innovation, and inter-sectoral spillovers result in differ- than three-fourths of Uzbekistan’s exports of IT, financial, and ent implications for productivity growth and inclusion. To classify professional services. “Cross-border supply” implies servic- services subsectors, this report uses three metrics: skill intensity, es that are delivered remotely; i.e., without the movement of as measured by the share of workers in a sector with tertiary ed- service providers or consumers. This offshorability mirrors ucation (based on ILOSTAT data derived from labor force surveys); trade in goods and therefore presents opportunities for gains the share of output used as intermediate consumption (based on from specialization. Input-Output Tables); and the share of output being exported (also • Transportation, administrative, and support services as well derived from Input-Output Tables). Based on these three metrics as wholesale trade play an important enabling role by provid- services can be clustered in four categories:a ing inputs to other sectors in the economy, while also employ- • IT, finance, and professional services are relatively skill inten- ing a large share of low-skilled workers. Of these low-skilled sive and play an important enabling role by providing inputs to enablers, transportation services are also more traded in- other sectors. These global innovator services (GIS) are also ternationally. Around three-fourths of Uzbekistan’s exports Chapter 1  The Services Sector and Structural Transformation 23 of transportation services are accounted for by “cross-bor- (mode 2 trade) resulting from tourism-related travel (figure der supply” (mode 1 trade), which is closely linked to the export 1.8, panel a). of goods. The remaining one-fourth is accounted for by “con- • Finally, education, public administration, and health services are sumption abroad” (mode 2 trade), which represents passen- relatively skill-intensive and see relatively few linkages with oth- ger transportation related to (tourism and other) travel (fig- er sectors. They are also less traded internationally. These so- ure 1.8, panel a). cial services are mostly delivered by the public sector.b • Retail trade, hospitality, and personal services employ a large The telecommunication sector falls between the global innovator share of low-skilled workers but provide little by way of pro- services and the low-skilled enablers categories. This sector re- ductivity-enhancing potential through linkages. Among these lies on a mixture of high and low-skilled employment in terms of low-skilled consumer services, only hospitality (which in- the delivery. It functions as an important network sector providing cludes hotels and restaurants) are relatively more traded connectivity. For this reason, telecommunications will be grouped across borders. Exports of hospitality services from Uzbek- with the other, mostly low-skilled, enabling sectors in the policy istan are entirely accounted for by “consumption abroad” discussion. a. This classification slightly differs from the services classification used in Nayyar et al. (2021), which distinguishes between low-skilled tradable and low-skilled domestic services instead of low-skilled consumer services and low skilled enablers. For this report, the latter classification is used to take into account that exports of services in Uzbekistan are relatively small and that therefore the degree that services enable other sectors is a more key defining feature. In the taxonomy presented, the tradability of services subsectors is measured through export intensity. However, this does not preclude the importance of services imports, especially when these imports bring in foreign capital and expertise. b. Social services — given the public nature of these services — are beyond the scope of this report. These services categories also vary in their mode of trade in international markets (see Box 1.2 on the four “modes” of trade in services). In Uzbekistan, exports of global innova- tor services are mostly driven by cross-border supply (“mode 1”). Exports of low-skilled enabling services such as transportation and wholesale trade are also driven by cross-bor- der supply (“mode 1”), largely through their linkages with goods-producing sectors. Ex- ports of low-skilled consumer services such as hospitality are entirely driven by consump- tion abroad (“mode 2”) through tourism-related activities. There is also some evidence of “health tourism” and “education tourism”, albeit small (figure 1.8, panel b). These services exports are largely attributable to individuals seeking medical treatment from neigh- boring countries (Tajikistan, Kazakhstan, and the Kyrgyz Republic)2 and students from South Asia enrolling at medical colleges.3 The movement of natural persons (“mode 4”) ac- BOX 1.2  Modes of services trade Under the World Trade Organization (WTO), the General Agree- • Mode 3 (Commercial presence) refers to cases where a ser- ment on Trade in Services distinguishes international services sup- vice supplier of one country provides a service to consumers in ply by the following four “modes”. another country by establishing a presence, including through ownership or lease of premises, such as branches of foreign • Mode 1 (Cross-border supply) covers services that flow from banks or international hotel chains. the territory of one country into the territory of another coun- try, such as distribution and e-commerce services. • Mode 4 (Movement of natural persons) refers to cases where persons of one country, such as medical doctors and nurses, • Mode 2 (Consumption abroad) refers to cases where a ser- provide services directly to consumers in another country by vice consumer moves to another country to obtain a service, entering the territory of another country (e.g., accountants, en- such as tourism and medical services. gineers, doctors, or teachers). counts for a small 2 https://www.akusherstvo.uz/conferences/uzbekistan-populyarnoe-napravlenie-medicinskogo-tur- izma?lang_is=set&lang_data=English 3 https://medium.com/@digitaldreammbbs/why-uzbekistan-has-become-the-top-choice-for-indian-stu- dents-to-study-mbbs-a7bcf8dc36b6 Chapter 1  The Services Sector and Structural Transformation 24 share of services exports among global innovator services, but such migration has im- portant economic implications (see Box 1.3). In Uzbekistan, commercial presence through foreign direct investment (“mode 3” trade) represents two-thirds (66 percent) of the country’s services imports (figure 1.8, panel a). Such foreign investment and the poten- tial for knowledge spillovers through linkages to other sectors can have cascading ef- fects on domestic firms. FIGURE 1.8  Commercial presence (FDI) is the main mode through which services are imported, while cross-border supply is the main mode through which services are exported in Uzbekistan a. Imports by mode of supply, Uzbekistan, 2017 b. Exports by mode of supply, Uzbekistan, 2017 ICT Transport Trade Hospitality Professional Professional Financial Trade Transport ICT Hospitality Financial Admin/support Admin/support Education Education Health Health Arts Arts Other services Other services 0 200 400 600 800 1,000 0 200 400 600 800 1,000 1,200 US$, millions US$, millions Cross-border supply Consumption abroad Commercial presence Movement of persons Source: World Trade Organization (WTO) Trade in Services by Mode of Supply (TiSMoS). Notes: Modes of supply are defined using the General Agreement on Trade in Services (GATS) definition (see also Box 1.3). 2017 is the latest year in the WTO Tis- MoS dataset. BOX 1.3  Migration and trade in services In Uzbekistan, emigration rates for high-skilled individuals are cost of remittances can have profound effect on remittance in- higher than for low-skilled individuals. The share of high-skilled flows. For example, Tajikistan and Viet Nam eliminated taxes on re- workers who migrated from Uzbekistan (11 percent) is higher than mittance inflows and they experienced higher remittance flows. the corresponding share for low-skilled individuals (8 percent) (fig- Furthermore, by enabling the movement of workers to destina- ure B1.3.1). The emigration rates from Uzbekistan for both high- and tions where earnings are higher, mode 4 trade in services allevi- low-skilled individuals are below that of its peers. There is a gender ates the pressure of underemployment and unemployment in la- component too; emigration rates for high-skilled women are compa- bor markets especially in Uzbekistan. rable to emigration rates for high-skilled men. However, emigration The migration of high-skilled individuals can bring long-term rates for low-skilled women are lower than for low-skilled men. Fur- benefits to innovation through knowledge spillovers. Even if the ther, emigration rates for high-skilled women are notably higher than migration of high-skilled individuals depletes the immediate pool the emigration rates for low-skilled women (figures B1.3.2 and B1.3.2). of high-skilled individuals within the country, there are gains over There are employment and income gains associated with the time, for instance, through knowledge transfers between the di- emigration of high-skilled and low-skilled workers. Migrant re- aspora and domestic markets. Viet Nam currently has programs mittances account for roughly 11.8 percent of GDP (2022), which that invite diaspora to take part in the formation of their econom- forms a significant source of consumption income. Reducing the ic development plan. Chapter 1  The Services Sector and Structural Transformation 25 FIGURE B1.3.1  Emigration rates for high-skilled individuals are higher than for low-skilled individuals, especially among women a. Emigration rates b. High-skilled c. Low-skilled 0.6 1.0 0.6 0.5 0.5 0.8 0.4 0.4 0.6 0.3 0.3 0.4 0.2 0.2 0.2 0.1 0.1 0 0 0 UMC LMC ECA UZB UMC LMC ECA UZB UMC LMC ECA UZB Source: Calculations based on World Bank (2023). Notes: ECA refers to Europe and Central Asia excluding high income countries. Median rates for each group reported as ‘X’. FIGURE B1.3.2  Emigration rates are higher for FIGURE B1.3.3  Emigration rates are higher for high-skilled women than men low-skilled men than women ARM ARM AZE AZE KAZ KAZ KGZ KGZ PHL PHL RUS RUS TJK TJK TUR TUR UZB UZB VNM VNM 0 0.1 0.2 0.3 0.4 0 0.1 0.2 0.3 0.4 High-skilled emigration rates Low-skilled emigration rates Female Male Female Male Source: Calculations based on World Bank (2023). Source: Calculations based on World Bank (2023). The composition of the services sector in Uzbekistan is skewed towards social services and low-skilled services. Social services, which include health, education and public ad- ministration, account for 35 percent of services employment and 25 percent of services val- ue added. Low-skilled (enabling and consumer) services account for almost two-thirds of total services’ employment and almost one-fourth of total services value added.4 Global 4 The wholesale and retail sector accounts for the largest share of service sector employment. In this report’s typology, wholesale and retail are classified in the categories of low-skilled enabler and low-skilled con- sumer services, respectively. Chapter 1  The Services Sector and Structural Transformation 26 innovator services (finance, ICT, and professional services) contribute to 20 percent of services value added but only 4 percent of services employment (figure 1.9, panel a). The weight of global innovator services is notably higher in advanced economies in the region. For example, among high-income EU countries, low-skilled services and global innovator services, respectively, accounted for 50 percent and 14 – 25 percent of services employment (figure 1.9, panels b and c). These differences, in part, reflect differences in the structural transformation process across levels of economic development. However, even compared to countries with similar income levels, the share of global innovator services in services employment in Uzbekistan is low. FIGURE 1.9  Uzbekistan’s services sector is dominated by low-skilled services as well as social services — with little prominence of global innovator services — which is consistent with its level of per capita income a. Shares in levels and growth of services employment and value-added, by services sub-sectors Share of services employment Share of services employment growth Share of services value-added Share of services value-added growth 0 10 20 30 40 50 60 70 80 90 100 Percent Social Low-Skilled Global Innoator Source: Authors’ calculations based on ILO and the Statistics Committee for the Republic of Uzbekistan. Notes: Shares are averages over the period 2017 – 2022. Global innovator services include telecommunications. b. Share of services employment in low-skilled services c. Share of services employment in global innovator services 100 40 90 35 80 30 25 70 Percent SVN Percent KGZ UZB AZE ROU CZE BGR 20 FRA EST ITA 60 RUS GRC HUNPRT DEU SVK POL GEO KAZHRV LVA LTU GRC LTU BGR HRV TJK POL EST ITA HUN LVA 15 50 SVK PRT DEU CZE ROU RUS SVN FRA 10 GEO KAZ 40 AZE 5 UZB 30 5 6 7 8 9 10 11 12 0 GDP per Capita 5 6 7 8 9 10 11 12 GDP per Capita Source: Calculations based on ILOSTAT. Note: Includes both low-skilled consumer and low-skilled enabler services (ex- Source: Calculations based on ILOSTAT. cluding telecommunications). Note: Global innovator services include telecommunications. Furthermore, the composition of female employment is concentrated in low (to medi- um)-skilled services. With the exception of the education sector, female employment is concentrated in low- to medium-skilled services, such as health and arts and recreation. The share of women among all workers employed in global innovator services is less than 40 percent (ICT, and finance and insurance) (figure 1.10, panel a). Further, the distribu- tion of workers with advanced levels of education that earn higher wages within these Chapter 1  The Services Sector and Structural Transformation 27 sectors is skewed towards men. For example, within ICT services, more than 40 percent of men have an advanced level of education while the corresponding share is less than 20 percent for women (figure 1.10, panel b). FIGURE 1.10  Within the services sector, female employment is mostly in social services and lower skilled services a. Gender employment distribution across services, 2020 b. Gender distribution of advanced educated workers in services, 2020 Wholesale and Retail Transport Accomodation and Food Services Accomodation and Food Services ICT ICT Finance and Finance and Insurance Insurance Professional Professional Administration/ Support Administration/ Public administration Support (incl. defense) Education Public administration (incl. defense) Health and Social Services Education Arts and Recreation Health and Social Other services Services 0 20 40 60 80 100 0 20 40 60 80 Percent Percent Female Male Female Male Source: ILO. Much of the growth in the services sector was driven by social services, mostly reflect- ing increased public spending, and global innovator services, where few people work. Productivity levels and productivity growth show a similar level of importance of global innovator services. Global innovator services have the highest levels of labor productivity (with ICT and financial services being more than 2.5 times as productive as manufacturing) and high levels of labor productivity growth (with professional services growing by 25 per- cent annually between 2017 – 2022) (figure 1.11). Unsurprisingly, therefore, global innova- tor services accounted for around 40 percent of value-added growth in the past five years. However, these services made a negligible contribution to employment growth during the same period (figure 1.9, panel a). In contrast, low-skilled (enabling services and consumer) services remain at low productivity levels and were characterized by low levels of produc- tivity growth. Between 2017 and 2022, social services, such as public administration and health, were characterized by productivity growth that matched the manufacturing sec- tor (figure 1.11, panel b). Social services also accounted for three-fourths of growth in ser- vices employment during this period (figure 1.9, panel a). This growth of the social services sector reflects an increase in government expenditure over the past five years. Therefore, the challenge for private sector-led growth in the services sector entails strengthening linkages with the rest of the economy, expanding the size of global in- novator services, and improving the productivity of low-skilled services. This report outlines three policy priorities to address these challenges for growth in the services sec- tor, focusing on market contestability, physical and digital connectivity, and worker and firm capabilities. Chapter 2 presents this policy framework and highlights some of the cross-cutting constraints across the services sector. The subsequent chapters will dive Chapter 1  The Services Sector and Structural Transformation 28 FIGURE 1.11  Global innovator services are both the most productive services as well as the biggest drivers of productivity growth a. Average value added per worker, 2017 – 2022, relative to manufacturing (=1) Manufacturing Accomodation and food Low-skilled Other services consumer Arts and recreation Wholesale and retail ICT Global Finacial and insurance innovator Professional Public Administration (incl. defense) Social Education Health and social services Low-skilled Transport enabler Administration/Support 0 1 2 3 4 5 6 7 8 9 10 11 12 Notes: Relative value-added per worker is calculated as value-added per worker for each sector is divided by that of manufacturing, before the average is com- puted over the years. ICT includes telecommunications. Source: Data on employment is obtained from ILO and the Uzbekistan Statistics Agency under the President of the Republic of Uzbekistan. Value-added data is ob- tained from Statistics Agency. b. Average growth in value added per worker, 2017 – 2022 Manufacturing Accomodation and food Low-skilled Other services consumer Arts and recreation Wholesale and retail ICT Global Finacial and insurance innovator Professional Public Administration (incl. defense) Social Education Health and social services Low-skilled Transport enabler Administration/Support −6 −4 −2 0 2 4 6 8 10 12 14 16 Percent Notes: Growth rate in value added per worker is estimated annually for each year before averaging over the period. Value-added data for several subsectors (in- cluding professional, public administration., administration and support, education, health and arts and recreation) begins in 2017 while the others begin in 2016. ICT includes telecommunications. Source: Data on employment is obtained from ILO and the Uzbekistan Statistics Agency under the President of the Republic of Uzbekistan. Value-added data is ob- tained from Statistics Agency. deeper on how these policy priorities might vary by the three challenges to the services sector’s growth. Chapter 3 will focus on the opportunities to strength the linkages be- tween services and other sectors in the economy, with a specific focus on low-skilled en- abling services. Chapter 4 relates to expanding the share of global innovator services, which have higher levels of productivity owing to their tradability and skill content. Chapter 5 relates to improving the productivity of low-skilled consumer services. Some of these ser- vices are not subject to international specialization, and owing to the importance of phys- ical proximity, will continue to employ large numbers of people. Addressing these challenges to accelerate the development of the services sector is con- sistent with the stated objectives of the Government of Uzbekistan. The resolution of the President of the Republic of Uzbekistan, dated May 11, 2021, emphasizes the need to Chapter 1  The Services Sector and Structural Transformation 29 transform the service sector into an important driver of economic growth. Furthermore, the provisions listed under Decree of the President of the Republic of Uzbekistan, dated 11 September 2023, on the “Uzbekistan 2030” Strategy are consistent with the three challeng- es around private sector-led growth in the services sector outlined above. Here are some examples. With respect to strengthening linkages between services with the rest of the economy, there is the stated aim of “enhancing integration of the Republic of Uzbekistan in global transportation and logistics chains and increasing capacity of the national trans- portation system”. With respect to expanding the size of global innovator services, there is the stated aim of “transforming the country into a regional ‘IT-HUB’ through develop- ment of digital technologies”. On improving the productivity of low-skilled services, there is the stated aim of “increasing the number of tourists through establishing broad condi- tions for development of tourism in Uzbekistan”. R 2 APTE C H A POLICY AGENDA FOR SERVICES: CONTESTABILITY, CONNECTIVITY, AND CAPABILITIES Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 31 The productivity benefits of scale, innovation, and spillovers associated with the ser- vices sector can be realized through progress along three areas of policy action: con- testability, connectivity, and capabilities (3Cs). The increased scope for scale, innovation, and spillovers has a primary mapping to each of the 3Cs even though this mapping is not always unique. The closest one-for-one associations are between scale and connectivity, innovation and capabilities, and spillovers and contestability. First, scale economies re- sult from access to larger markets which, in turn, is closely linked to (international) trade opportunities. Physical and virtual (digital) connectivity is a pre-requisite to boost ser- vices trade, both directly as well as indirectly through linkages with other sectors. Second, innovation in the services sector derives from combining labor with human capital, ICT capital, and increasingly even intangible capital. This places a premium on the capabili- ties of firms and workers. Third, services play an enabling role in the wider economy be- cause they provide intermediate inputs to other sectors. This makes contestability even more important because productivity benefits from greater competition can have bene- fits throughout the value chain. Improvements in contestability, connectivity, and capabilities (3Cs) encompass mul- tifaceted policies that cover a wide range of areas. Policy areas relevant to the growth of the services sector vary from skills upgrading and competition policy to trade opening. • Contestability — The focus here is on restrictions to competition and trade. Policies re- strict the entry of foreign expertise and capital in the services sector. This includes, for example, data-related regulations, licensing requirements for service providers, and limits on foreign direct investment. In fact, many of the restrictions to services trade are “behind-the-border” restrictions that also impact domestic services providers. The role of competition policy to level the playing field with state-owned enterprises is also an important consideration. • Connectivity — The development of ports, roads, airports, and warehousing matters for accessing growth opportunities beyond the local market. Such transportation infra- structure is itself part of the services sector and can expand opportunities for trade in goods as well as for trade in services when it involves the movement of people. The same holds true for digital connectivity as the diffusion of digital technologies has reduced the importance of geographical proximity between service providers and consumers. • Capabilities — The focus here is on improving the skills of workers and the competen- cies of firms. Improving training and skills development is central to raising produc- tivity while also enabling more workers to move to better-paying services. This does not mean that all the needed skills are “high end.” Basic digital skills, such as how to use email and the internet, rely on foundational cognitive skills, such as literacy and numeracy, as well as “soft” skills that foster adaptability, problem solving, and initia- tive. Management capabilities and organizational practices also matter for technolo- gy adoption and innovation. There is considerable scope for Uzbekistan to improve along the three policy areas of contestability, connectivity, and capabilities. To illustrate how Uzbekistan performs relative to comparator countries across the 3Cs, figure 2.1 aggregates relevant indicators to measure each of the 3Cs. Contestability is summarized by the World Bank’s services trade restrictiveness index (STRI) which measures policies that impose barriers on inter- national trade transactions. Connectivity combines the World Bank’s logistics perfor- mance index with the coverage of broadband connectivity that measure the necessary physical and digital infrastructure for access to larger markets. Capabilities combine ter- tiary school enrollment with the share of the population with advanced digital literacy Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 32 skills. These measure digital and other advanced technical skills that foster innovation and knowledge creation. Uzbekistan ranks below comparator countries along the dimen- sions of connectivity and capabilities. The gap with respect to capabilities is larger when compared to regional peers. On contestability, Uzbekistan is placed in the lowest tercile of countries in a global sample, but so too are its comparators (figure 2.1). FIGURE 2.1  Compared to global comparator countries, Uzbekistan underperforms on the policy dimensions of connectivity, capabilities, and contestability Country Distribution in the Space of Connectivity, Capability and Contestability 2.0 1.5 1.0 TUR 0.5 MYS Capabilities 0.0 0 RUS KAZ −0.5 VNM −1.0 UZB −1.5 −2.0 −1.5 −1.0 −0.5 0 0.0 0.5 1.0 1.5 2.0 Connectivity Low Contestability Medium Contestability High Contestability Source: Elaboration based on World Bank-WTO Services Trade Policy Database (see also Borchert, Gootiiz, and Mattoo 2014); International Telecommunications Union’s ICT Indicators Database; and World Development Indicators. Notes: Country data are for the 2018 – 2022 taking latest available year. Each of the 3Cs is described by a summary measure that aggregates relevant indicators. “Contestability” consists of the average STRI score excluding construction. “Capabilities” comprises the use of standard ICT skillsa and tertiary school enrollment rates. “Connectivity” combines the logistics performance index score and the percentage of individuals using the internet. The “capabilities” and “connectedness” indexes based on their mean z-score value between the two indicators. For “Contestability” they are categorized as high, medium, or low in contestability based on partitioning the z-scores from the STRI into terciles. a. This measure is based on the average of four indicators which include the share of individuals: using basic arithmetic formula in a spreadsheet; connecting and installing new devices; finding, downloading, installing and configuring software; and creating electronic presentations with presentation software (in some cases, only two of the indicators are present). Bringing about improvements along the dimensions of contestability, connectivity, and capabilities is consistent with the stated objectives of the Government of Uzbekistan. This is reflected in the provisions listed under Decree of the President of the Republic of Uzbekistan, dated 11 September 2023, on the “Uzbekistan 2030” Strategy. On capabili- ties, the stated objectives include, “providing modern knowledge and skills through the development of vocational education system” and “increasing enrollment in higher edu- cation and improving the quality of training specialists with higher education”. On con- testability, the stated objectives include “implementing consistent transition of monopo- listic sectors to market principles, increasing the private sector share in the economy, and creating the most favorable conditions for free activities of entrepreneurs”. On connec- tivity, the stated objectives include “providing stable and long-term sources of financing to infrastructure projects”. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 33 CONTESTABILITY: TRADE RESTRICTIONS AND DOMESTIC MARKET COMPETITIVENESS Regulatory barriers to services trade in Uzbekistan are significantly high and not a single services subsector can be considered as being “open” to trade. Most services are classified as having “major restrictions” to trade (with STRI scores around 50), highlighting the pervasiveness of services trade restrictions across all services subsectors (figure 2.2). Not a single services sector in Uzbekistan has an STRI score below 30, which would corre- spond to being “open” to trade in services.5 Only four sectors — sound recording, health services, hospitality, and third-country legal representation — are classified as having FIGURE 2.2  Trade in services is characterized by major restrictions in most sectors, with some sectors virtually closed to competition STRI Scores for all services sectors in Uzbekistan Retail Trade Wholesale Banking Life insurance Finance Non-life insurance Reinsurance Third-country Legal Host country advisory Representation Video Media Audio Television Accounting Architecture Professional Auditing Computer Engineering Fixed-line Telecom Mobile Air freight domestic Air freight international Air passenger domestic Transport Air passenger international Postal Rail freight Road freight Hotels Travel Tourist guides Travel agencies Construction Other Health services 0 25 50 75 100 Source: WTO-WB Services Trade Policy Database and Services Trade Restrictions Index (STRI). Note: The index scores can be interpreted as follows: 0 — completely open; 25 — virtually open with minor restrictions, 50 — major restrictions, 75 — virtually closed, 100 — completely closed. 5 In its policy dialogue with client countries, the World Bank generally considers STRI scores above 25 as war- ranting closer scrutiny. Scores close to or above 50 are considered to be highly restrictive and indicative of major obstacles to the entry and operation of foreign services and services suppliers. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 34 “minor restrictions”. The most restricted sectors, with scores close to 100 (“closed”), include legal representation, rail freight, and tourist guide services.6 Restrictions on services trade in Uzbekistan are largely attributable to restrictions on cross-border delivery. The average STRI score for Uzbekistan is particularly high for cross-border supply; i.e., mode 1 trade (80.3 compared to 47.3 and 36.5, respectively, for modes 3 and 4), and higher than the corresponding scores for comparator countries such as Kazakhstan, Colombia, Peru, and Viet Nam.7 This is due to the cumulative effect of horizontal measures which apply to all sectors as well as sector-specific policies. Cross-border supply is prohibit- ed in 11 out of 31 sub-sectors in Uzbekistan. BOX 2.1  Measuring restrictions to services trade Services trade restrictions are particularly high in sub- sectors that provide intermediate inputs to the rest The Services Trade Restrictiveness Index (STRI) is the method- of the economy. Sectors with high restrictions include ology jointly developed by the World Bank and the World Trade those with significant impacts on economy-wide perfor- Organization (WTO) to conduct regulatory audits. The STRI con- mance such as financial services, transportation, tele- stitutes 35 online questionnaires which cover 34 sub-sectors and which are populated by national law firms and consult- communications (fixed and mobile), professional, and ants and reviewed by a WTO-WB team. It ranges from 0 to 100, ICT services, all scoring closer to or above 50 (“major re- where 0 indicates that none of the restrictions underlying the strictions”). Because of the key intermediation role ser- index are applied, and 100 means that the sector/mode is com- vices play as inputs into other goods and service-produc- pletely closed to foreign services and service suppliers. It pri- ing activities, evidence of highly restrictive STRI scores marily focusses on market entry and operational measures point to potentially damaging economy-wide impacts. (with an identification of discriminatory treatment of foreign providers/services) and covers aspects of domestic regula- tion, data protection policies, and competition law. Like the WTO The presence of state-owned enterprises across many General Agreement of Trade in Services, the STRI adopts the services subsectors, especially those with few mar- four modes of services supply and Services Sectoral Classi- ket failures, poses challenges for contestability. The fication List (MTN.GNS/W/120). World Bank Business of the State (BOS) database sug- gests that 60 percent of businesses with at least 10 per- cent state ownership (1,227 entities) in Uzbekistan are operating in the services sector. Furthermore, of the 19 largest SOEs, seven are in the services sector. While state owner- ship often responds to market failures (e.g., natural monopolies), 87 percent of business with state ownership (1,069 entities) in the services sector can be found in in subsectors where there is little rationale for state-owned enterprises.8 This includes professional and technical services (349 entities), wholesale and retail (223 entities), real estate (171 enti- ties), and ICT (157 entities) (figure 2.3). The participation of the state in markets where pri- vate sector delivery is viable can affect competitive neutrality if state-owned enterpris- es are afforded unfair advantages. In addition, many sectors with a high state presence lack an independent regulator, meaning that the sector is typically regulated by the min- istries directly, potentially creating a conflict of interest. This is discussed further in the sectoral deep dives in later chapters.9 6 There are also several restrictions that affect foreign providers across all services sectors. Foreign service suppliers are required to establish a local company, which is more costly than having a branch or represen- tative office that are not recognized as legal entities. There is also scope to improve public consultation pro- cesses, transparency, and due process to provide certainty to businesses. Currently, there is no legal require- ment to publish draft measures or give interested persons an opportunity to comment in Uzbekistan. Such lack of regulatory transparency may act as an impediment to foreign service suppliers even in the absence of formal legal restrictions to foreign participation. 7 These were selected as peers due to similarity in economic structure, level of economic development, and geography. 8 This classification uses the methodology of Dall’Olio et al. (2022). 9 Forthcoming iSOE assessment for Uzbekistan. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 35 FIGURE 2.3  There are many businesses with state ownership in the services sector, including in subsectors where private provision can be effective Number of businesses with at least 10 percent state ownership in Uzbekistan, 2019 Professional Wholesale Real estate ICT Transport Services Admin and support Arts Financial Other services Hospitality Construction Manufacturing Agriculture Non-services Electricity/gas Water Mining 0 50 100 150 200 250 300 350 Competitive Partially contestable Natural monopoly Source: World Bank Businesses of the State (BOS) database, as of November 2022. Note: SOEs are classified based on their activities at the NACE-4-digit level, based on the sectoral classification of Dall’Olio et al. (2022). The benefits of services trade liberalization Restrictions on services trade are substantially higher than tariff barriers on goods. On average, the ad-valorem tariff equivalents (AVEs) derived from the services trade re- strictiveness index are in the range of 30 percent for mode 1 and about 20 percent for mode 3 trade (figure 2.4). For the least restricted countries, AVEs10 are as low as 1 to 2 percent. In FIGURE 2.4  Services restrictions correspond to tariff equivalents of more than 25 percent for mode 1 trade and more than 15 percent for mode 3 trade a. Tariff equivalents, mode 1 (cross-border delivery) b. Tariff equivalents, mode 3 (commercial presence) Other Financial Inter Land transport Other Business Services Air transport Insurance Information and communication Land transport Other Business Services Other Financial Inter Accommodation, Food and services act Human health Information and communication Insurance Human health Accommodation, Food and services act Wholesale and retail trade Wholesale and retail trade Air transport Construction 0 10 20 30 40 0 10 20 30 40 Percent Percent UZB Best performer UZB Best performer Source: World Bank staff calculations. 10 Collected STRIs for many countries can be used to calculate ad-valorem equivalents (AVEs) of these services trade reg- ulatory costs based on a structural gravity estimation. These measures can be interpreted comparably to the effect of tariffs on raising the trade costs of imported services by mode of supply, and their removal can be used to analyze the likely economic effects for services sectors and the rest of the economy of reforming such barriers to services trade. AVEs for all services sectors with available STRIs were calculated and aggregated into model sectors and mode of supply. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 36 Uzbekistan, the average tariff protection on goods is in the rage of 7 percent on a Most- Favored Nation (MFN) basis. There are tariffs peaks, however, for example for beverages and tobacco and clothing (both around 30 percent). This suggests that services barriers are in the range of these tariff peaks on goods. Uzbekistan has much to gain in terms of output, trade, and investment from reforming regulations that impose restrictions on services trade, especially through cross-bor- der delivery. Results from a simulation exercise (see Box 2.2) show that the economy could expand by as much as 9 percent in terms of real GDP if services restrictions are reformed to eliminate the most restrictive barriers and close the gap with the best performer (par- tial liberalization) by 50 percent (figure 2.5). If the gap with the best performer is closed entirely (full liberalization), there could be as much as 17 percent increase in real GDP. The liberalization of mode 3 trade, i.e., foreign direct investment, brings few additional gains. Real exports, imports, and investment in Uzbekistan could also increase in the range of 5 to 8 percent from partially reforming services barriers.11 FIGURE 2.5  Liberalizing barriers to services trade in Uzbekistan is expected to increase GDP, trade and investment. a. Partial: Reduces gap in AVEs to best performer by half b. Full: Reduces AVEs to best performer Real investment Real investment Real imports Real imports Real exports Real exports Real GDP Real GDP 0 1 2 3 4 5 6 7 8 9 0 2 4 6 8 10 12 14 16 18 Percent Percent Mode 1 only Modes 1 and 3 Mode 1 only Modes 1 and 3 Source: World Bank staff calculations. BOX 2.2  Economic gains from reducing restrictions on services trade We employ a Computable General Equilibrium (CGE) model to country input-output (I-O) databases. This refers to the GTAP da- estimate the economic gains from removal of services restric- tabase with base year 2017 (version 11) just released in 2023, with tions identified in the STRI. In the simulation exercise, we assume Uzbekistan identified as a separate region.b The identified sectors full liberalization of the services sector. We estimate the impacts cover the whole economy in each model region and 23 regions.c on intersectoral gains as well as gains to wages and welfare. The framework employed has two key elements: a multi-region, mul- In addition to removing distortions, opening to trade in servic- ti-sector computable general equilibrium (CGE) model and a global es can result in significant productivity gains for the services dataset. The CGE model refers to the GTAP model, which is based sector and other sectors of the economy that rely on servic- on standard economic theory.a Standard comparative static sim- es inputs. The empirical literature provides ex-post evidence that ulations allow labor, capital, and other primary factors to reallo- opening to trade can result in productivity gains that enhances the cate across sectors, while their economy-wide availability is held economic gains arising from the removal of allocative inefficien- fixed. To include potential effects on economic growth, the simula- cies. These gains can occur in the sector being directly reformed tions discussed here allow the availability of economy-wide capital (the output channel), as well as productivity gains in using sec- to expand or contract because of the simulated changes in trade tors (the input channel). Estimates of such productivity respons- policy. In addition to the model, a global database is used that per- es to reduced trade costs focus on manufacturing liberalization mits CGE simulations for Uzbekistan in a global model for the first where an elasticity of tariffs changes to firm-level productivity time. The model is calibrated over a well-documented global data- gains has been measured.d The same economic effect likely holds base which combines bilateral trade for 65 sectors with individual for the case of services, while similar estimates building on tariff 11 Much of these gains relate to the liberalization of restrictions in mode 1 services trade. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 37 equivalents for services trade restrictions are less available.e Yet The ex-ante estimates in this analysis adopt these productivity evidence on the connection between services trade reform and channels by assuming productivity gain responses to trade open- productivity gains in manufacturing can be found in the literature.f ing within the range of those documented in the literature.g a. The structure of the model is discussed in Corong et al. (2017). b. Aguiar et al. (2022). c. These regions include: Uzbekistan, China, EU27, Russia, Korea, Kazakhstan, United States, Türkiye, ECA neighbors (Belarus, Kyrgyzstan, Tajikistan, Turk- menistan, Armenia, Azerbaijan, and Georgia), Japan, India, Ukraine, the UK, Switzerland, Iran, Afghanistan, and seven regional aggregates for other partners. d. See, for example, Amiti and Konings (2007), Khandelwal and Topalova (2011), and Fieler and Harrison (2023). e. Evidence of a positive link between services trade liberalization and increases in productivity in the services sector includes Papaioannou (2018), and Fu, Wang, and Yang (2023). f. See, for example, Arnold, Javorcik, and Mattoo (2011), Shepotylo and Vakhitov (2012), and Arnold, Javorcik, Lipscomb, and Mattoo (2016). g. Specifically, total factor productivity is assumed to increase by 0.3 percent for each percent point reduction in tariff equivalents. All sectors of the economy can benefit from an opening of services trade, including the manufacturing sector. Services and manufacturing output would expand in the range of 8 to 9 percent with a partial liberalization of services restrictions. These sectoral ex- pansions are amplified (for example to close to 15 and 19 percent for manufacturing and services, respectively) if a full liberalization is simulated (figure 2.6). As with the case of economy-wide estimates, the majority of the expansion in sectoral output relates to the liberalization of the restrictions in mode 1 trade. Within the manufacturing sector, in- dustries such as motor vehicles and chemicals would see the largest expansions. Within the services sector, global innovator services and hospitality services would see the larg- est expansions (figure 2.8, panel a). FIGURE 2.6  There are large impacts of services liberalization across all sectors, also outside of services. a. Partial: Reduces gap in AVEs to best performer by half b. Full: Reduces AVEs to best performer Services Services Manufacturing Manufacturing Other NR and fuels Other NR and fuels Agri-food Agri-food 0 2 4 6 8 10 0 4 8 12 16 20 Percent Percent Mode 1 only Modes 1 and 3 Mode 1 only Modes 1 and 3 Source: World Bank staff calculations. The liberalization of the services sector in Uzbekistan is also projected to increase real incomes. Real incomes would increase by about 8 percent in a partial liberalization sce- nario and by 16 percent in a full liberalization scenario (figure 2.7). Wages of both skilled and unskilled workers would go up in all considered scenarios. Without accompanying productivity effects, the effects between skilled and unskilled workers are very close to each other at 0.8 and 1 percent, respectively. The wage gap, however, expands marginally in favor of skilled workers (at 11 percent versus a 9 percent increase) when productivity gains are linked to services liberalization. The largest real income gains from reforms to services trade restrictions are expected in wholesale and retail trade, ICT, other business services, and financial services. This ranking of services with respect to real income gains reflect their contribution to aggre- gate value added or in providing inputs to other sectors. Reforms are expected to have the Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 38 FIGURE 2.7  Liberalizing services is expected to increase incomes of both unskilled and skilled workers a. Partial: Reduces gap in AVEs to best performer by half b. Full: Reduces AVEs to best performer Real wages, skilled Real wages, skilled Real wages, unskilled Real wages, unskilled Real income (welfare) Real income (welfare) 0 2 4 6 8 10 0 4 8 12 16 Percent Percent Mode 1 only Modes 1 and 3 Mode 1 only Modes 1 and 3 Source: World Bank staff calculations. largest effect in the retail and wholesale services, which play an important role in facil- itating trade in goods. In addition, lower retail prices for consumers can benefit house- holds. The other sectors with large, expected impacts include business services (profes- sional services and administrative services), followed by ICT and financial services (figure 2.8, panel b). FIGURE 2.8  There are large gains in output and wages of liberalizing barriers to services trade in Uzbekistan a. Change in sectoral output for selected services sub-sectors from Full and Partial b. Decomposition of welfare gain by Liberalization sector of reform, partial liberalization modes 1 and 3 Trade Accommodation, Food and service activities Trade Transport nec Water transport Other business Air transport services Warehousing and support activities Information, Communication communication Financial services nec Insurance (formerly isr) Other financial intermed. Real estate activities Business services nec Accomodation, Food and service Recreational and other services Public Administration and defense Insurance Education Human health and social work activities Land transport Mining 0 10 20 30 40 50 Other services Percent 0 10 20 30 40 Partial Full Percent Source: World Bank staff calculations. Note: Welfare in the model is measured by the equivalent variation and includes consumer purchasing power improvements. Uzbekistan’s WTO accession process provides an entry point in making commitments to- wards liberalizing the services sector. The WTO accession for Uzbekistan has been on-go- ing since 1994 but has seen a recent acceleration. The country formally resumed accession in 2020 and commitments towards liberalizing services sectors — which requires many “behind the border” regulatory reforms — are a crucial part of the negotiations. The po- tential benefits of WTO accession suggest high impacts from the resulting liberalization of services trade (Box 2.3). The anticipated growth in Uzbekistan, under the market liberal- ization scenario, is expected to be driven predominantly by the liberalization of services Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 39 trade, which accounts for about 80 percent of the increase. The implementation of trade facilitation (which improves the efficiency of transportation and logistics services)12 and the facilitation of foreign direct investment (“mode 3” of services trade) will play an im- portant role in boosting the benefits, increasing the gains in real GDP from approximate- ly 10 percent (under market access liberalization only) to about 22 percent (with comple- mentary trade facilitation and investment growth). BOX 2.3  Leveraging Uzbekistan’s WTO accession process to reduce services trade restrictions Uzbekistan’s quest to accede to the World Trade Organization, a WTO, Uzbekistan would automatically assume the Trade Facilita- priority the government has on numerous occasions recently re- tion Agreement (TFA) obligations, and this would stand to improve affirmed with a view to joining the world trade body by the time of its logistics performance and border management, a critical is- its next Ministerial meeting in early 2026, offers a ready-made sue in a country suffering from double “landlockedness”. Further- setting in which to address the prohibitively high level of policy re- more, joining plurilateral disciplines on services domestic regula- strictiveness found in the country’s service sector. tion (SDR)a — as Comoros and Timor-Leste recently did upon joining the WTO — can reduce trade costs and ensure that Uzbek rules The experience gained from the WTO accession of other transition governing licensing, accreditation, and technical standards in ser- economies strongly suggests that the policies and market struc- vices pursue legitimate public policy objectives in a manner that tures that underpin restrictions in Uzbekistan’s services sector minimizes adverse effects on cross-border trade and investment. will come under considerable scrutiny as the country pursues the Other accession-related steps to boost market contestability and WTO accession process. The success of its accession journey, and improve overall governance include joining the WTO’s Government the likelihood of its completion within the next two years, may well Procurement Agreement (GPA),b a plurilateral pact that covers hinge on the willingness and ability of policy makers to embrace state purchases of both goods and services,c as well as signing a sequence of reforms aimed at boosting the contestability of the onto the updated Information Technology Agreementd with a view country’s service economy. Doing so would also address prevail- to boosting the ICT services sector by eliminating tariffs on a wide ing hurdles to connectivity, both physical and digital, while also help- range of ICT goods that are central to the supply and use of glob- ing attract the larger doses of foreign capital (via mode 3 com- al innovator services. Finally, given the predominance of mode 3 mitments), technologies and talents (via mode 4 commitments on trade (commercial presence) in services, Uzbekistan should sig- intra-corporate transferees and specialists) that the shift towards nal its readiness to join the plurilateral agreement on Investment modern innovator services will require. Facilitation for Development (IFD)e when it comes into force. As Beyond aiming for an ambitious set of sector and mode-specif- with plurilateral disciplines on services domestic regulation, the ic commitments under the General Agreement on Trade in Ser- IFD aims to boost the friendliness of signatories’ investment cli- vices (GATS), Uzbekistan can leverage its WTO accession by ad- mates by facilitating FDI inflows and reducing the red tape associ- vancing reforms in a host of complimentary areas. By joining the ated with establishing a commercial presence. a. In December 2021, 67 WTO members adopted a Declaration announcing the successful conclusion of negotiations on services domestic regulation aimed at increasing transparency, predictability, and efficiency of procedures for authorization of service providers. Since February 2024 and follow- ing the conclusion of certification procedures under the GATS, the disciplines have entered into force for 46 WTO members that collectively account for an estimated 92 percent of world trade in commercial services. Implementation of the disciplines is expected to lower trade costs by over USD 125 bil- lion worldwide. b. See https://www.wto.org/english/tratop_e/gproc_e/gp_gpa_e.htm c. The WTO estimates that services account for roughly 50 percent of non-defense procurement expenditures. d. The Information Technology Agreement (ITA) was concluded by 29 participants at the Singapore Ministerial Conference in December 1996. Since then, the number of participants has grown to 82, representing about 97 percent of world trade in IT products. The participants are committed to complete- ly eliminating tariffs on IT products covered by the Agreement. At the Nairobi Ministerial Conference in December 2015, over 50 members concluded the expansion of the Agreement, which now covers an additional 201 products valued at over $1.3 trillion per year. e. Originally launched in spring 2017 by a group of developing and least-developed WTO members, the Investment Facilitation for Development (IFD) Ini- tiative aims to develop a global agreement on IFD to improve the investment and business climate and make it easier for investors in all sectors of the economy to invest, conduct their day-to-day business, and expand their operations. The 124 WTO members participating in the Initiative finalized the IFD Agreement in November 2023. This plurilateral agreement is open for all WTO members to join. Unlike multilateral agreements, plurilateral agreements under the WTO are binding only on those members accepting their terms. 12 Uzbekistan’s accession to the WTO will comprise the Trade Facilitation Agreement (that entered into force in February 2017), which is an important step forward in facilitating the movement of goods across borders. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 40 CONNECTIVITY: ENABLING DIGITAL AND PHYSICAL CONNECTIONS Trade costs in Uzbekistan are among the highest in the world. Trade costs — that mea- sure the price difference between domestic trade and international trade in the same type of goods — in Uzbekistan are among the top 20 countries worldwide, and comparable to economies with one fourth of its GDP per capita.13 Over the last two decades, Uzbekistan has the highest trade costs compared to its regional peers — including Kazakhstan, Armenia, Georgia, and the regional average for Eastern Europe and Central Asia (excluding high income countries) (figure 2.9, panel a). And these trade costs have especially increased for manufactured goods during this period (figure 2.9, panel b). These high trade costs are linked, at least in part, to Uzbekistan’s geography of being one of only two countries in the world that are “double-landlocked” (i.e., surrounded by countries that are also land- locked). Better logistics can ease the costs of geographical distance. International evi- dence suggests that a 10 percent improvement in logistics performance leads to a 2.3 per- cent increase in trade flows (Arvis, Duval, and Shepherd 2013). FIGURE 2.9  Uzbekistan has the highest trade costs compared to its regional peers and these have increased over the past two decades a. Bilateral trade costs with Germany b. Uzbekistan’s bilateral trade costs with Germany, by sector 220 280 Percent ad-valorem equivalent Percent ad-valorem equivalent 180 240 200 140 160 100 120 60 01 03 05 07 09 11 13 15 17 19 21 20 20 20 20 20 20 20 20 20 20 20 06 08 10 12 14 16 18 20 20 20 20 20 20 20 20 20 Agriculture, hunting, forestry and fishing GEO KAZ RUS ECA UZB Manufacturing Total Goods Source: ESCAP-World Bank Trade Costs Database. Note: ECA refers to Europe and Central Asia excluding high income countries Uzbekistan’s physical connectivity to markets is hindered by the relative inefficiency of its transportation and logistics services. Despite improvements in its customs pro- cedures as well as capacity of organizing competitively priced shipments in recent years, Uzbekistan has experienced a decline in its logistics performance since 2018 with regard to infrastructure, tracking, tracing, and timeliness (figure 2.10). Uzbekistan ranks 88 out of 139 economies globally in the World Bank’s 2023 Logistics Performance Index (LPI). Furthermore, compared to peer countries, Uzbekistan’s performance on customs proce- dures, international shipments, and logistics competence is comparable to those of Georgia or Kazakhstan, but falls behind in the overall logistics performance score as well as in its tracking and timeliness components (figure 2.11).14 According to an Enterprise Survey 13 World Bank-ESCAP International Trade Costs Database 14 The former reflects the level of transparency and availability of real-time information for tracking ship- ments; the latter refers to the ability of shipments to reach a destination within the scheduled or expected delivery time. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 41 conducted in Uzbekistan in 2019, approximately 22.2 percent of firms (whose direct ex- ports constitute 10 percent or more of their sales) identify customs and trade regulations as a major or severe obstacle to exporting. In comparison, 13.3 percent of firms in Europe and Central Asia and 7 percent of firms across the world report customs and trade regu- lations as a major obstacle in their business. FIGURE 2.10  Uzbekistan has experienced a decline in its logistics performance since 2018 with regard to infrastructure, tracking, tracing, and timeliness Uzbekistan’s Logistics Performance Index, 2007 – 2023 4 3 2 1 0 LPI Score Customs Infrastructure International Logistics Tracking & Timeliness Score Score shipments competence tracing Score Score Score Score 2007 2010 2012 2014 2016 2018 2023 Source: World Bank Logistics Performance Index. Note: Minimum score =1; maximum score = 5 FIGURE 2.11  Uzbekistan’s overall logistics performance score lags regional comparators Uzbekistan and comparators in the Logistics Performance Index, 2023 4 100 LPI Rank (1= best, 139= worst) LPI score (min=1, max=5) 80 3 60 2 40 1 20 0 0 GEO KAZ ECA UZB LPI Score Customs Score Infrastructure Score International shipments Score Logistics competence Score Tracking & tracing Score Timeliness Score LPI Rank Source: World Bank Logistics Performance Index. Digital connectivity has been increasing in Uzbekistan, yet the use of digital technol- ogies is not universal. The International Telecommunications Union (ITU) estimates that the proportion of individuals using the Internet has increased significantly, from 15.9 per- cent to 76.6 percent between 2010 and 2021. People mainly use mobile services to gain ac- cess to the internet: 71 percent of the population relies on mobile networks for accessing the internet, while only 24 percent makes use of fixed broadband networks. The digital di- vide between urban and rural areas also remains, especially for fixed broadband services. In 2022, 80 percent of people in urban areas used the internet, while the corresponding share in rural areas was 74 percent. Further, only 14 percent of people in rural areas had access to fixed broadband internet compared with 32 percent in urban areas. Although Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 42 there have been efforts to extend fixed broadband services to rural areas through build- ing the fiber optic infrastructure, mobile access remains the most important source of ac- cess to the internet for many people. The quality of broadband connectivity also continues to lag. The coverage of slower tele- communication technologies, 2G and 3G, is similar as regional peers. However, the coverage of faster forms of mobile internet, such as 4G/LTE, remains lower compared to peer coun- tries (figure 2.12, panel a) as well a broader set of countries at similar levels of per capita in- come (figure 2.12, panel b). Uzbekistan is also in the global bottom half in terms of internet speed. Tests conducted by SpeedTest rank Uzbekistan 99th for the speed of mobile access (out of 145 countries) and 90th for fixed broadband (out of 181 countries).15 Mobile down- load speeds are low compared to other countries in region and of similar incomes (figure 2.12, panel c), while fixed broadband download speeds are at similar levels as neighboring countries but still fall below the global frontier (figure 2.12, panel d). FIGURE 2.12  The quality of Uzbekistan’s broadband connectivity continues to lag comparator countries a. Coverage of 2G, 3G, and LTE, 2021 b. Coverage of 4G/LTE against income level, 2021 AZE 100 ARM VNM GEO AZE RUS IND KAZ 80 TJK Mobile Network Coverage for KGZ UZB LTE Technology, 2021 KAZ TJK 60 RUS PHL 40 VNM ARM 20 UZB 0 10 20 30 40 50 60 70 80 90 100 0 Percent 5 6 7 8 9 10 11 12 13 2G 3G LTE GDP per Capita, 2021 (logs) c. Mobile broadband download speed, 2020 d. Fixed broadband download speed, 2020 100 200 Download Speed (Mbps), 2020 Download Speed (Mbps), 2020 Average Mobile Broadband 80 160 Average Fixed Broadband 60 120 40 80 VNM RUS ARM AZE 20 KGZ PHL RUS KAZ 40 IND VNM KAZ KGZ PHL ARM TJK IND TJK UZB UZB AZE 0 0 5 6 7 8 9 10 11 12 13 5 6 7 8 9 10 11 12 13 GDP per Capita, 2020 (logs) GDP per Capita, 2020 (logs) Source: International Telecommunications Union (ITU) and World Bank WDI 15 Source: Ookla Speedtest Global Index, November 2023. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 43 Further, prices for telecommunication-related services are lower than before but re- main high compared to some peer countries and advanced economies. Costs of telecom- munication services used to be very high in Uzbekistan. Recently, prices have been de- creasing, and this was achieved without any price controls. Nevertheless, scope remains to further increase affordability both compared to peer countries such as India and Viet Nam but also compared to advanced economies (figure 2.13). The relatively high price of telecommunication services is attributable, at least in part, to the lack of competition in the sector in Uzbekistan. FIGURE 2.13  Prices of mobile broadband are lower than before, but affordability remains low compared to some peer countries and advanced economies a. Price of mobile broadband b. Affordability of mobile broadband 30 16 14 Price as a percent of GNI per Capita 25 12 20 10 8 US$ 15 6 10 4 5 2 0 0 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 12 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 20 GEO IND KAZ PHL GEO IND KAZ PHL RUS VNM GBR UZB RUS VNM UZB Source: International Telecommunications Union (ITU). Source: International Telecommunications Union (ITU). Notes: Affordability is defined as the price as a percentage of GNI per capi- Notes: Prices are measured for 1GB of data between the period 2012 – 2016. ta. Prices are measured for 1GB of data between the period 2012 – 2016, from From 2017, prices are for 1.5GB of data. 2017 prices are for 1.5GB of data. CAPABILITIES: ENHANCING WORKER SKILLS AND MANAGEMENT PRACTICES IN FIRMS Uzbekistan’s emphasis on advanced, technical education is developing a relevant skill base but this needs to be expanded. Uzbekistan’s tertiary enrolment rates lag most devel- oping economies in the Central Asia region (figure 2.14, panel a). With a population of over 36 million, almost as large as the other four Central Asian countries combined, skill devel- opment would create a sizable pool of skilled workers. However, while the critical mass of individuals completing higher education remains low, the share of university gradu- ates in Uzbekistan that completed degrees in science, technology, engineering, and man- agement (STEM)-related fields exceeds that in other developing economies in the region as well as peer countries outside the region such as Viet Nam (figure 2.14, panel b). And with the exception of Kazakhstan, the share of the population with advanced ICT skills is similar to other peer countries figure 2.14, panel c). Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 44 FIGURE 2.14  Uzbekistan’s emphasis on advanced, technical education is developing a relevant skill base but this needs to be expanded a: Tertiary enrolment rates (gross) b: Percentage of graduates in different fields ARM ARM AZE GEO AZE IND GEO KAZ KGZ KAZ LMC KGZ OED PHL RUS UZB TJK VNM UMC UZB RUS VNM 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 Percent Percent Female Male Total STEM EMC Non-STEM Source: World Bank, World Development Indicators (WDI). Agriculture ICT Notes: Data period is for 2022 excluding Kazakhstan, Russia, and Philippines where latest data available is for 2020, 2019 and 2021, respectively. LMC and Source: World Bank, Educational Statistics Database UMC are lower and upper middle income country aggregates. OED is OECD Notes: Data is for 2019 excluding Russia, Tajikistan, and Viet Nam, where most aggregate. Tertiary enrolment rates refer to the ratio of total enrollment, re- recent data is from 2018, 2017, and 2016, respectively. STEM represents Sci- gardless of age, to the population of the age group that officially corresponds ence, Technology, Engineering and Mathematics. EMC represents Engineering, to the tertiary education level. Manufacturing and Construction. c. Percentage of individuals with advanced ICT Skills d. PISA Scores across Science, Mathematics and Reading 6 500 5 400 4 PISA scores, 2022 Percent 3 300 2 200 1 100 0 AZE GEO KAZ PHL RUS UZB VNM 0 Source: International Telecommunications Union (ITU). TUR VNM KAZ PHL UZB GEO Notes: Data period is latest data available and runs from 2018 – 2022. The indi- cator that captures the percentage of population in a country with advanced Science Reading Mathematics ICT skills measures the percentage of the population capable of “writing a computer program using a programming language”. Source: OECD Programme for International Student Assessment (PISA) 2022. The adoption of structured managerial practices among services firms in Uzbekistan is low compared to peer countries as well as compared to firms in the country’s man- ufacturing sector. Structured managerial and organizational practices are important determinants of firm-level productivity and have been documented to be low for manu- facturing firms in Uzbekistan (Bloom, Schweiger, and Van Reenen 2012). Firm-level evi- dence from the World Bank Enterprise Survey suggest that the adoption of structured Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 45 managerial and organizational practices is low in Uzbekistan (figure 2.15, panel a).16 The measured practices in the Enterprise Survey include whether firms set targets for their production, whether these targets are monitored, whether incentives are used to moti- vate employees, and how firms deal with problems in the production process.17 There is a positive relationship between the adoption of structured management practices and labor productivity in services sectors in Uzbekistan (figure 2.15, panel b). And this relationship is stronger for the services sector than for the manufacturing sector. FIGURE 2.15  There is a positive relationship between the adoption of structured management practices and labor productivity in the services sectors, but adoption is low a. Index of structured management practices adoption, b. Coefficient of regression of labor productivity on 2017 – 2019 management practices COL 0.8 0.753** LVA 0.7 0.648* 0.646** ARG 0.628*** 0.598** EST 0.6 0.533 LTU 0.5 RUS KGZ 0.4 HUN 0.3 UKR TUR 0.2 KAZ 0.1 ROU TJK 0 UZB −0.1 GEO JOR −0.2 POL UZB MNG UKR HUN KGZ 0 1 2 3 4 5 6 7 8 9 10 Manufacturing Services Manufacturing Services Source: Calculations based on World Bank Enterprise Survey data (see Nay- Source: Calculations based on World Bank Enterprise Survey data. yar et al. 2021). Notes: The index is calculated based on self-reported adoption of managerial Note: labor productivity is measured by the logarithm of sales per employee, practices, and include practices around operations, monitoring, the setting of in USD. Stars indicate statistical significance levels (* p = 0.10, ** p = 0.05 and targets and the use of incentives. *** p = 0.01). The 3Cs matter for leveraging growth opportunities across the services sector but can be assigned differential weights for the three challenges associated with the three sec- tor categories. For expanding the share of global innovator services, digital connectivity is a prerequisite for exporting. So too are the capabilities of workers to match skill require- ments and contestability that provides competition to domestic service providers. For strengthening linkages between services and other sectors of the economy, connectivity 16 Analysis of structured managerial practices — based on the World Management Survey methodol- ogy — within manufacturing firms suggest that the adoption of such practices was the lowest in Uzbekistan (Bloom, Schweiger, & Van Reenen 2012). 17 The questions in the Enterprise Survey are adapted from the Management and Organizational Practices Survey (MOPS), which has been administered by the US Census Bureau. Although the practices covered are similar to the World Management Survey (WMS), the most prominent data collection effort around struc- tured management practices, the MOPS and Enterprise Surveys, depend on self-reported answers instead of scoring by an independent evaluator. Self-reported answers can be more inaccurate and also introduce cul- tural differences in responses (e.g., similar to those seen with innovation questions, see Cirera & Muzi 2020). Bloom et al. (2019) highlight that within the US, there is a high correlation between WMS and MOPS scores. Chapter 2  A Policy Agenda for Services: Contestability, Connectivity, and Capabilities 46 is important as the physical and digital infrastructure associated with transportation and telecommunication services is a fundamental economy wide-enabler. These linkages also mean that greater contestability in these sectors has cascading productivity benefits. Capabilities matter less owing to lower skill requirements. For improving the productiv- ity of low-skilled consumer services, capabilities again matter less. And so too does con- testability in largely non-traded services with few state-owned enterprises. Digital con- nectivity is the policy lever which matters most to incorporate the productivity benefits of technology adoption (Table 2.1). TABLE 2.1  Policy priorities for the three growth pathways Focus sectors Key subsectors Connectivity Contestability Capabilities Enabling services: Strengthen linkages between Transportation and logistics, services and other sectors High High Medium telecommunications (CHAPTER 3) Global innovator services: Expand footprint IT, professional services, High High High financial services (CHAPTER 4) Low-skilled services: Increase productivity Retail, hospitality, personal High Medium Medium services (CHAPTER 5) R 3 APTE C H STRENGTHENING THE LINKAGES BETWEEN SERVICES AND OTHER SECTORS Chapter 3  Strengthening the Linkages between Services and Other Sectors 48 Services play an important enabling role by providing inputs to other sectors in the economy, including manufacturing, creating multiplier effects. They play a crucial role in the production process of goods or other services. For example, a goods exporter relies on transportation and logistical services to transport their products across bor- ders. Technology adoption by firms typically also requires services inputs, such as ICT or engineering services. This creates multiplier effects: evidence shows that increasing the price and quality of the services through reforms has a significant positive impact on manufacturing productivity (Arnold et al. 2016; Arnold et al. 2011; Bas and Causa 2013; Francois and Woerz 2008). This chapter highlights that the linkages between the services sector and other sec- tors are weak — and that significant restrictions exist in enabling services, such as telecommunications and transportation. The services sectors that play an enabling role are the telecommunications sector, transportation services, administrative and support services, wholesale, and global innovator services. The analysis of services trade restric- tions presented in the previous chapter already highlighted that many of these sectors face high restrictions. This chapter provides a deep-dive on two low-skilled enabling sec- tors that face high restrictions: telecommunications and transportation services. The analysis of trade restrictions on global innovator services — which also provide inputs to the rest of the economy — is provided in the next chapter. WEAK LINKAGES BETWEEN SERVICES AND OTHER SECTORS In Uzbekistan, services mostly serve final consumers and play only a small role in providing inputs to other sectors. Of the services worth 176 trillion sum consumed in 2018, 81 trillion were consumed by final consumers, 29 trillion were exported, and 67 trillion were used as intermediate consumption by other sectors in the economy (figure 3.1).18 This implies that close to half of services (46 percent) value output is ac- counted for by domestic consumption. Of those services that provide inputs to other economic activities rather than final consumers, most of these inputs are provided to other services sectors. Compared globally, the input-output linkages between the services and manufac- turing sectors are weak. Services account for less than a tenth (9 percent) of the inputs used in the manufacturing sector in Uzbekistan (figure 3.2). The corresponding share in higher-income countries and in many regional peer countries is much higher, rang- ing from 40 percent in the United States and 35 percent in Germany (35 percent) to 31 percent in Russia. The share of global innovator services providing inputs is also low in Uzbekistan: only 1.6 percent of inputs in the manufacturing sector are from global inno- vator services (professional, technical, financial, and ICT services). This is considerably lower than in other countries. For example, in the United States, 9 percent of manufac- turing inputs are from global innovator services sectors.19 18 This figure includes consumption of services imports, which are valued at 23 trillion sum. Consumption fig- ures exclude gross capital formation (which includes the accumulation of inventories), which represent another 16 trillion sum. 19 Percentages are based on calculations from OECD input-output tables, available through STATOECD. Chapter 3  Strengthening the Linkages between Services and Other Sectors 49 FIGURE 3.1  Most services are produced for domestic FIGURE 3.2  Manufacturing sectors rely very little consumption on services as inputs for the production process Graphical representation of input-output table, 2018 Share of services as inputs for manufacturing, 2018 ices Exports GBR d Serv hin Ot Co USA g ns u rin DEU m u ct pt fa ion POL nu Ma RUS ture TUR Agricul PHL IND IDN CHN A gr ic u VNM s ic e lt u re rv UZB Se in d 0 10 20 30 40 er Man Oth Percent u fa ct u r i n g Source: Calculations based on the Input-Output Tables, prepared by the Statis- Source: Calculations based on OECD Input-Output Tables and Uzbekistan In- tics Agency under the President of the Republic of Uzbekistan. put-Output Tables, prepared by the Statistics Agency under the President of Note: Input-output tables present the flows between sellers and purchasers, the Republic of Uzbekistan. by sector. The thickness of the arrow represents the size of the flow. "Other Note: The share is calculated by calculating services inputs as share of total in- ind” includes mining, construction, and utilities. termediate consumption by manufacturing sectors. Nevertheless, the services providing inputs still play an important role in jobs, includ- ing through enabling exports. Outside of transportation services, 563,000 jobs in the ser- vices sector are estimated to be associated with exports. Of these, only 180,000 services jobs are involved in direct exporting, while another 389,000 jobs are associated with ex- ports through forward linkages (figure 3.3). For certain services subsectors, the number FIGURE 3.3  Many services jobs support exports through other sectors rather than direct exports Number of jobs associated with exports (forward linkages), 2018 Manufacturing Agriculture Other non-services Transportation and logistics Other low-skilled services High-skilled services 0 100 200 300 400 500 600 700 Thousand Supporting exports directly Supporting other sector's exports Source: Calculations based on ILOSTAT and the Input-Output table for Uzbekistan, prepared by the Statistics Agency under the President of the Republic of Uzbekistan. Note: This figure shows forward linkages; the amount of jobs involved in the exports of other sectors. Chapter 3  Strengthening the Linkages between Services and Other Sectors 50 of jobs associated with indirect exports exceeds that of direct exports. For example, of the 73,000 jobs associated with exports in professional services, roughly two-thirds of them (48,000 jobs) are accounted for indirect exports. Despite weak linkages with manufacturing, there are still many (unskilled) services jobs associated with manufacturing exports. For every 10 jobs in manufacturing in- volved in exports, there are another four jobs in the services sector. Many of these jobs are less dependent on skills: of the four jobs in the services sector associated with the ex- ports of the manufacturing sector through input-output linkages, three are conducted by workers with less than tertiary education. In fact, across most exporting sectors, the services jobs that are linked to these exports tend to be of workers with less than tertia- ry education (figure 3.4). This also holds true for some of the knowledge-intensive ser- vices sectors, such as ICT services, which depend on less-skilled services like administra- tive and support services for their exports. This highlights that linkages are an import- ant aspect of job creation. FIGURE 3.4  Exports by most sectors depend on services jobs through linkages Number of jobs per billion sum exports (backward linkages), 2018 Agriculture Mining Manufacturing Construction Wholesale/retail Transport Hospitality ICT Financial Professional & technical Admin / support Arts Other 0 10 20 30 40 50 60 70 80 90 Direct—skilled Indirect services—skilled Indirect other—skilled Direct—unskilled Indirect services—unskilled Indirect other—unskilled Source: Calculations based on ILOSTAT and the Input-Output table for Uzbekistan, prepared by the Statistics Agency under the President of the Republic of Uzbekistan. Note: This figure shows backward linkages; the amount of jobs from other sectors involved in the export of the listed sector. The weak linkages between services and other sectors can be driven by demand-side and supply-side factors. Demand-side factors refer to constraints among those sectors that buy services inputs. Whether a sector relies on inputs of services sectors depends to a large extent on factors like the technology and knowledge intensity of the production process (e.g., whether engineering services are needed for production), the role of technol- ogies (e.g., whether software and other IT services are needed) and the role of trade (e.g., whether logistical services are needed for sourcing inputs or selling products). Supply-side factors refer to constraints among the services sectors that are providing inputs. If the quality of the services on offer is not high enough or the price not competitive, firms that buy services will have to find alternatives (e.g., switching to another technology, import- ing services, or providing them in-house). The low knowledge intensity of the manufacturing sector in Uzbekistan limits the de- mand for services. The four largest manufacturing subsectors, which consist of the met- allurgical industry, vehicles production, food production and textile production, are not Chapter 3  Strengthening the Linkages between Services and Other Sectors 51 very services-intensive in their production. For each of these industries, 10 percent or less of their inputs are from services sector firms (figure 3.5). The output shares of more ser- vices-intensive industries — such as the production of pharmaceuticals and the produc- tion of computers and other electronic equipment — are relatively low. Shifting produc- tion into these higher value-added industries will increase demand for services inputs. Similarly, improving the technological sophistication of manufacturing and other firms can increase demand for knowledge-intensive services, for example, ICT services to devel- op software and engineering services to implement new machinery. FIGURE 3.5  The most prominent manufacturing sectors are less dependent on services Manufacturing output shares and their services dependency, 2018 24 Repair Pharma 20 Services dependency, percent 16 Computers Non-metallic Beverages Other 12 Electrical Clothing Chemical Leather Vehicles Furniture Rubber/plastics Metallurgical 8 Refined petro Paper Machinery Metal products Textile Food 4 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Output shares, percent Source: Calculations based on the Input-Output table for Uzbekistan, prepared by the Statistics Agency under the President of the Republic of Uzbekistan. Note: Services dependency is the share of inputs that belong to services sectors. Output shares are determined by the total production of that sector (and might differ from value added shares). On the supply side, many of the services sectors that enable growth in other sectors face restrictions, limiting the multiplier effect of services. As later sections will show, the price level of certain enabling services, such as telecommunications and transporta- tion services, is high and the quality on offer could be improved. This could prevent firms in other sectors from becoming more productive by using more sophisticated technologies or prevent the development of higher value-added activities. Trade barriers could make this worse. Given that not all required services might be available in Uzbekistan, such bar- riers might prevent firms from obtaining the services they need to increase their produc- tivity from other countries (see Box 3.1 on financial services). BOX 3.1  Financial services in Uzbekistan Financial services in Uzbekistan are classified as global innovator ser- between 2017 – 2022 (corresponding to 0.5 percent of overall em- vices as they are more knowledge-intensive, provide a higher share ployment and 1.1 percent of employment in services sector) (Figure of their output as intermediate inputs to other sectors, and are more B3.1.1). The sector plays an important economy-wide enabling role by traded internationally. The financial sector contributes to 2.8 percent providing firms with access to credit and consumers with banking of GDP and has been employing, on average, 73 thousand workers services, while also offering insurance and related financial services. Chapter 3  Strengthening the Linkages between Services and Other Sectors 52 FIGURE B3.1.1  Financial services only provide FIGURE B3.1.3  Restrictions to trade in financial 0.5 percent of employment, but contribute to 2.8 services remain high, especially for cross-border percent of GDP supply of services Financial sector share in GDP and employment 2017 – 2022 Services trade restrictions in the financial sector, by mode of supply, 2022 Share of GDP 100 Share of Total 80 Employment 60 Share of Service 40 Sector Employment 20 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 0 Percent Commercial Life Non-life Reinsurance banking insurance insurance and Source: ILO and Employment Yearbook published by State Statics Com- retrocession mittee of Uzbekistan. Notes: Share of employment and GDP averaged over the period. Financial Cross-border supply (mode 1) sector here refers to finance and insurance activities. Commercial presence (mode 3) Movement of natural persons (mode 4) There is significant scope to improve access to financial services in Uzbekistan. Compared to the regional average in Europe and Central Source: WTO-WB Services Trade Policy Database and Services Trade Re- Asia, firms report difficulties in accessing credit, with 16 percent of strictions Index (STRI). firms reporting that they are fully credit constrained (Figure B3.1.2) Note: The index scores can be interpreted as follows: 0 — completely and another 11 percent of firms reporting that they are partially cred- open; 25 — virtually open with minor restrictions, 50 — major restrictions, it constrained. The share of the population with a bank account (44 75 — virtually closed, 100 — completely closed. percent in 2021) is also lower than the regional average (90 per- There is also scope to increase digitalization of the sector. The use cent) and in comparator countries such as Kazakhstan (81 percent).a of digital technologies for financial payments is low in Uzbekistan, with less than 20 percent of account holders accessing their ac- FIGURE B3.1.2  Roughly 16 percent of firms report count digitally for payments (FigureB3.1.4). Growth in digital pay- ments is indicative of an expanding digital economy and enables the that they are fully credit constrained, higher than growth in other aspects of the digital economy, including e-com- the average for Europe and Central Asia merce. Digital payments can also contribute to financial inclu- Share of firms indicating that they are fully credit constrained sion, especially for those in remote areas without access to for- mal banking services or those receiving remittances informally. UZB ECA FIGURE B3.1.4  The use of digital technologies for COL making payments is low in Uzbekistan compared KAZ to comparator countries PER Percentage of individuals using an account to make digital VNM payments 0 2 4 6 8 10 12 14 16 18 20 22 50 Percent UMC 40 Source: World Bank Enterprise Survey data. 30 Percent Note: Data for Uzbekistan relates to 2019, for other countries the most re- cent year with available data. 20 LMC 10 Restrictions to trade and investment in the financial sector remain substantial. The sector is virtually closed for cross-border supply of 0 services (mode 1) and sees substantial restrictions to foreign direct in- AZE PHL GEO ARM UZB VNM KAZ TUR RUS vestment (mode 3) (Figure B3.1.3). These restrictions relate to foreign Source: World Bank Digital Findex, 2017. ownership requirements (which is restricted for foreign ownership Notes: Digital Findex, data is for 2017. Use here refers to individuals with a outside of foreign banks, international financial institutions, and cred- financial institution account and they used a mobile phone or the Internet to it organizations), more stringent minimum capital requirements, and make a payment, make a purchase, or to send or receive money through differential licensing procedures (compared to national providers). their financial institution account. ISO-3 Digit codes for countries reported. a. These figures relate to the percentage of the population aged 15 years and older with a financial account at a bank or other financial institution. The source of these figures is the World Bank’s Findex Database, 2021. Chapter 3  Strengthening the Linkages between Services and Other Sectors 53 TELECOMMUNICATIONS: THE BACKBONE FOR DIGITALIZING THE ECONOMY Telecommunications services are an important sector providing connectivity to the economy, but the sector is characterized by limited contestability and there is scope to improve capabilities. Telecommunications services provide the essential infrastruc- ture required for digital transactions and communications. Nevertheless, it is also a sec- tor where there is scope for increasing contestability by creating a more level playing field for telecommunication providers. As a services sector, it is relatively capital intensive and increasing connectivity will require the adoption of more sophisticated technologies, re- quiring adequate capabilities. Contestability As highlighted in the previous chapter, there are significant restrictions to ser- vices trade in the telecommunication sector. The World Bank-WTO Services Trade Restrictiveness Index classifies both mobile telecommunication services and fixed-line telecommunications as having “major restrictions” (figure 3.6). These restrictions are at similar levels as found in Kazakhstan and Viet Nam, but significantly higher than in countries like Colombia and Peru. The trade modelling presented in Chapter 2 also sug- gests that the largest gains from services liberation can be expected in the information and communication sec- FIGURE 3.6  Trade in mobile and fixed-line tor (about 12 percent of economy-wide welfare gains; telecommunications is characterized by major figure 2.8, panel b). restrictions The telecommunications landscape is characterized STRI for telecommunication sectors by limited competition, with strong government pres- ence. The government-owned joint stock company (JSC) Uztelecom is the main telecommunications company in Mobile tele- communications Uzbekistan and it owns more than 95 percent of the fi- ber optic backbone and middle-mile infrastructure in the country. There are many internet service providers (around 30 – 40 licensed providers), with the COVID-19 Fixed-line tele- pandemic period having been pivotal in increasing de- communications mand for such services. Uztelecom also provides inter- net services through their UzOnline subsidiary, and in rural areas, UzOnline is often the main option for fixed 0 10 20 30 40 50 60 70 network connections available. COL PER VNM KAZ UZB The mobile market has multiple players, but three Source: WTO-WB Services Trade Policy Database and Services Trade Restric- of them have partial or full government ownership. tions Index (STRI). Note: The index scores can be interpreted as follows: 0 — completely open; There are several mobile network operators (MNOs), in- 25 — virtually open with minor restrictions, 50 — major restrictions, 75 — virtu- cluding UZMobile, MobiUZ, UCELL and Unitel (operating ally closed, 100 — completely closed. as Beeline). Three of these operators are state-owned or have government ownership through a joint venture: UZMobile is a wholly owned sub- sidiary of Uztelecom, MobiUZ is slated for privatization but is currently owned by the Ministry of Information Technologies and Communications (MITC), and UCELL is in joint ownership between the Government of Uzbekistan and Russian investors. Unitel is the only mobile network operator that is fully in private hands and is owned by the Russian company Veon (with a registration in the Netherlands). No spectrum auction has ever taken place. Chapter 3  Strengthening the Linkages between Services and Other Sectors 54 Uzbekistan scores poorly in measures of regulatory quality and overall competition for telecommunication services. Data from the International Telecommunication Union (ITU) Regulatory Tracker suggest that Uzbekistan’s telecommunications sector is consid- erably more regulated compared to peer countries, both with respect to the competition framework and the regulatory regime and authority framework (figure 3.7). The compe- tition framework score measures the level of competition in the provision of ICT services, which ranges from the provision of broadband to restrictions on foreign participation in the ownership of domestic infrastructure. The regulatory authority and regime score assess the level of accountability and monitoring across the ICT sector. This ranges from the presence of a competition authority to an independent regulator with autonomy in decision making and enforcement. The low score for Uzbekistan reflects the absence of an independent regulator for telecommunications. FIGURE 3.7  Regulatory quality in the ICT sector is low compared to other countries, including in the region a. ITU overall regulatory score b. ITU competition framework score c. ITU regulatory score ARM ARM ARM AUT AUT AUT CHN CHN CHN FRA FRA FRA GEO GEO GEO IND IND IND KAZ KAZ KAZ PHL PHL PHL RUS GBR RUS RUS USA GBR GBR UZB USA USA VNM UZB UZB 0 5 10 15 20 25 30 VNM VNM Regulatory Regime 0 20 40 60 80 100 0 5 10 15 20 25 30 Regulatory Authority Source: International Telecommunications Union (ITU). Notes: Data is based on ITU Regulatory Tracker scores for 2020. The overall ITU regulator score is the aggregate score of 50 indicators that comprise of 4 sub-categories. The regulatory regime and authority score assess the efficiency and existence of the regulatory authority. The competition framework score assesses the level of competition in telecoms market as well as the participation and ownership of foreign firms in domestic markets. See www.itu.int/go/track- er for greater details on all indicators. The market is dependent on the state-owned Uztelecom for international gateway ac- cess. Uztelecom has a de facto monopoly for providing international gateway access to in- ternet providers and mobile network operators. Providers depend on wholesale prices set by Uztelecom in order to provide internet access to their customers. In 2018, liberaliza- tion of the international gateway was identified as an objective under the “Strategy on Innovation Development”, but this was never realized. Security concerns have been giv- en as a reason for limiting entry to this sector.20 Uztelecom and their subsidiaries also re- 20 USAID (2022). Chapter 3  Strengthening the Linkages between Services and Other Sectors 55 ceive preferential treatment that includes the procurement of telecom equipment with- out tender, facilitated access to land plots, and streamlined processes to place antennas in the country. Licensing procedures are also onerous. Currently, for a provider to offer new products or services, approval of the Republican Council on Radiofrequency under the MITC is required to obtain a license. Some of the licensing requirements can be difficult for pro- viders to meet, leading to potential arbitrary interpretations. For example, license require- ments include a “mandatory provision of services for consumers in rural areas, sparsely populated and hard-to-reach areas”, which can be costly and difficult to meet for new operators. In addition, there are criteria that could be grounds for revocation or decline that are described too broadly or can be arbitrarily interpreted, for example, require- ments on ensuring the “established quality standards”, participation in national pro- grams for the development of telecommunications, and adherence to national security requirements. International best practice for new market entry is a notification proce- dure instead of licensing. Capabilities In terms of capabilities, the telecommunications sector relies on continuous technolog- ical improvements, but Uzbekistan has been a slow adopter. Uzbekistan has been a slow adopter of more sophisticated technologies in telecommunications. For example, the intro- duction of 4G (LTE) in Uzbekistan happened in 2015, which was several years behind other countries in the region, including Georgia, Kazakhstan, and Russia (figure 3.8). Even after its introduction, the coverage of 4G among mobile phone users was slower than in other countries, essentially lagging coverage rates in regional countries by about three years. A similar pattern of slow coverage increase was seen with the adoption of 3G in the early 2010s. FIGURE 3.8  Uzbekistan has been lagging with respect to the adoption of mobile technologies a. Population with 3G coverage b. Population with 4G (LTE) coverage 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 12 13 14 15 16 17 18 19 20 21 12 13 14 15 16 17 18 19 20 21 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 GEO KAZ RUS UZB GEO KAZ RUS UZB Source: International Telecommunications Union (ITU). Even though coverage has increased, the uptake of mobile services — including 3G and 4G — remains poor in Uzbekistan. While coverage of 3G is now among universal and 4G coverage increasing, the uptake of these technologies remains low compared to other Chapter 3  Strengthening the Linkages between Services and Other Sectors 56 countries (figure 3.9, panel a). The diffusion of fixed services has also been low, with the penetration of fixed line broadband services (at 22 percent of the population with a fixed broadband subscription) remaining low (figure 3.9, panel b). FIGURE 3.9  The uptake of mobile services and fixed-line services such as broadband remains low a. Penetration of mobile services (2G, 3G, and 4G), 2021 b. Penetration of fixed line services (broadband and telephone), 2021 RUS GEO KAZ RUS GEO UZB PHL TUR TUR AZE VNM VNM AZE KAZ TJK PHL UZB TJK 0 10 20 30 40 50 60 70 80 90 100 0 5 10 15 20 25 30 Subscribers per 100 People Subscribers per 100 People 2G 3G 4G Fixed Telephone Broadband Source: Calculations based on Telegeography (2021) and World Bank WDI. Technical specifications that apply in Uzbekistan often do not conform to global stan- dards. Technical specifications needed for obtaining a license in Uzbekistan adhere to re- gional standards rather than global standards. For example, the 2017 Technical Regula- tion of Uzbekistan on telecommunications equipment relies heavily on the GOST standards, which have their origins in the Soviet Union and are currently maintained by the Com- monwealth of Independent States (CIS), and the telecommunication standards under GOST do not always align with global standards. The reliance on GOST standards gives compa- nies from the region, especially Russian companies, an advantage, but can also preclude the adoption of technical standards that are on the global frontier. TRANSPORTATION AND LOGISTICS: FACILITATING TRADE IN GOODS AND MOVEMENT OF PEOPLE Transportation and logistics services is another important enabling sector in the econ- omy, facilitating the movement of people and goods within and outside the country. In Uzbekistan, road transportation is the most common form of transportation for goods, with roughly 90 percent of goods transported in this way, followed by rail and pipeline transportation (both 5 percent) (figure 3.10, panel a). When correcting for the distances covered, road transportation accounts for only 27 percent of domestic freight, while the share of pipeline and rail transportation become much higher. Pipeline transportation accounts for 40 percent of ton-kilometers and rail transportation accounts for a third of ton-kilometers (figure 3.10, panel b). This suggests that road transportation is important for shorter distances. Chapter 3  Strengthening the Linkages between Services and Other Sectors 57 FIGURE 3.10  Road transportation is the most important mode of transport by weight, while pipeline and rail transportation are important modes when looking at ton-kilometers a. Transport shares, by weight, 2022 b. Transport shares, by ton-kilometers, 2022 Railway Railway 5% 5% Road 0.4% Road Pipeline Pipeline Air 33.2% Air 39.5% 90% 26.9% Source: Uzbekistan Statistics Agency under the President of the Republic of Uzbekistan Note: A ton-kilometer is cargo weight multiplied with the distance travelled. Connectivity Transportation and logistics services are a prerequisite for strengthening physical con- nectivity to markets but the sector in Uzbekistan underperforms compared to region- al peers. As highlighted in the previous chapter, the World Bank’s Logistics Performance Index (LPI) ranks Uzbekistan behind regional peer countries like Georgia and Kazakhstan, especially with regard to the tracking and tracing (reflecting the level of transparency and availability of real-time information for tracking shipments) and timeliness compo- nents (reflecting the ability of shipments to reach a destination within the scheduled or expected delivery time). Several hurdles stand in the way: Third-party logistics (3PL) is roughly one third of that in Kazakhstan and one tenth of Türkiye. Regulations are frag- mented and unevenly applied. As a double land-locked country, access to trade corridors is important for Uzbekistan. The current main trade corridor is through Kazakhstan. About 75 percent of Uzbekistan’s total merchandise trade in weight enters and exits the country through Kazakhstan. The Trans-Kazakh (TCR) and Trans-Siberian Railway (TSR) are two common choices when it comes to moving goods to and from China, Uzbekistan’s largest trading partner. The TCR shows larger variability in transit times (30 days versus 15 days), which is partially driven by rail and border capacity issues in Kazakhstan and China. Corridors towards the South can provide maritime access for Uzbek goods but still face operational constraints. Transit through Afghanistan has been foreclosed for Uzbek trucks and requires transshipment, adding delays and costs for traders. Alternatively, Iranian ports come as less expensive and have been long used by Uzbek traders. However, the sanction regime, difficult access to banking, costly road tolls, and administrative issues (difficulties in obtaining road per- mits, mandatory use of local brokers to handle formalities) harm transit development. Postal services in Uzbekistan are less effective than in comparator countries, with con- sequences for digital development, particularly e-commerce. E-commerce shipments, both domestic and international, are dependent on postal services. Domestic supply chain efficiency is crucial for e-commerce. The last mile in the domestic supply chain depends Chapter 3  Strengthening the Linkages between Services and Other Sectors 58 significantly on the quality and competency of logistic services. Cross-country data from the Universal Postal Union (UPU) indicates poor performance of Uzbekistan across the Reliability, Relevance, Resilience, and Reach dimensions, which capture the quality of service, connectivity, market competitiveness, and sustainability, respectively (figure 3.11, panles a and b). Addressing the issues in postal services within Uzbekistan is relevant for growth of the digital economy, specifically for e-commerce, as e-commerce companies and consumers prioritize the predictability and timeliness of deliveries.21 FIGURE 3.11  Postal services underperform compared to comparator peer countries a. UPU Integrated Index for Postal Development, 2022 b. UPU components for the Index for Postal Development, 2022 70 7 Re lia bi lity 60 6 50 5 2PID score (Max = 100) ce ien PDL (Max = 10) 40 4 sil Re h ac 30 3 20 Re 40 ARM 20 2 60 KAZ RUS 10 1 80 TUR VNM Re PHL lev 100 an 0 0 UZB ce ARM KAZ RUS TUR UZB VNM PHL Source: Universal Postal Union (UPU) data for 2022. Notes: 2PID is the aggregated of the Integrated Index for Postal Development. Integrated Index for Postal Development Score (2PID) Reliability captures the development of quality of service from a speed and Postal Development Level (right scale) predictability perspective. Reach captures the level of postal connectivity of the country with the rest of the world from an outbound perspective. Rele- Source: Universal Postal Union (UPU) data for 2022. vance captures the relative success of different postal business models and Notes: 2PID is the aggregated of the Integrated Index for Postal Development. activities from a demand perspective. Resilience captures the estimated postal The country’s postal development level (PDL) based on the 2IPD score. Coun- capacity to overcome economic, social, technology and environmental shocks tries are classified into 10 levels. The highest score is 10. The lowest score is 1. in a sustainable way. Contestability The transportation and logistics services sectors are characterized by limited contest- ability of markets. As highlighted in the previous chapter, the transportation sector faces major restrictions when it comes to services trade (figure 3.12). For the transportation of goods, limitations exist for transportation by rail (which is dominated by the national rail- way company and privileged freight forwarders), international transportation by road, as well as warehousing. Each segment of the transportation services subsector is character- ized by contestability issues. 21 See World Bank, 2022, “Digital Economy in Southeast Asia.” Chapter 3  Strengthening the Linkages between Services and Other Sectors 59 FIGURE 3.12  The transportation sector faces major restrictions when it comes to trade in services Services Trade Restrictiveness Index (STRI) for the transportation subsectors, 2018 Air freight domestic Air freight international Air passenger domestic Air passenger international Postal and courier services Rail: Freight transportation Road: Freight transportation 0 10 20 30 40 50 60 70 80 90 100 COL KAZ PER VNM UZB Source: WTO-WB Services Trade Policy Database and Services Trade Restrictions Index (STRI). Note: The index scores can be interpreted as follows: 0 — completely open; 25 — virtually open with minor restrictions, 50 — major restrictions, 75 — virtually closed, 100 — completely closed. RAIL Rail transportation services are provided by Uzbekistan Temir Yo’llari (UTY). The UTY joint stock company has a statutory monopoly in the sector. The length of the network is 4,669 kilometers, of which about half is electrified. A high-speed passenger line operates between Tashkent and Bukhara, with speeds up to 250 km/h. Freight transport by rail mostly focuses on cargo that cannot be easily transported by road, including bulk cargo and dangerous chemicals. Rail is not deemed to be competitive for time-sensitive cargo, high value cargo, consumer products, and perishables.22 Efforts have been on-going to modernize the rail sector, including splitting the own- ership of track infrastructure and the provision of rail services. UTY currently oper- ates both the passenger and freight trains in the country as well as owns the track in- frastructure. The World Bank through its Development Policy Lending Operation (DPO) supported reforms of the rail sector that involved the liberalization of the railway market through the restructuring of the SOE rail operator — UTY. Rail services have now been de- coupled — separating freight, business, and passenger units with mandated outsourcing of non-core activities in the business unit. Furthermore, the reforms now outline specif- ic responsibilities for public sector participation with a roadmap that details private sec- tor participation in the rail sector. International cargo transportation remains the monopoly of UTY, who contracts out allocation to several freight forwarders. UTY has contracts with several “master” freight forwarders, who reserve capacity on freight trains (called “railway codes”) and act as in- termediaries. Other freight transporters do not interact with UTY directly but must buy 22 CAREC Program (2021). Chapter 3  Strengthening the Linkages between Services and Other Sectors 60 “codes” from this small group of intermediary freight forwarders, opening the possibility of monopolistic practices. Prices for freight are deemed to be high.23 Other constraints re- ported include difficulties in obtaining connections from non-public tracks to public tracks. ROAD Contestability in road freight transport is affected by various regulations establish- ing quotas and fees for foreign carriers. About 500 international road carriers are es- timated to be active in Uzbekistan. However, permits and licenses are needed for trans- porting bulky and heavy cargo as well as for international freight transportation. There are quotas on permits for cross-border transportation. These quotas are determined by economic means tests and are based on forecasts of transportation needs for the next year. There are fees in place for international transport, with preferential rates offered to some of the neighboring countries. For transport vehicles of Tajikistan, fees vary be- tween $100 and $200 (depending on weight); for those of Turkmenistan the fees vary be- tween $50 and $150 (depending on weight); and for Kazakh and Kyrgyz vehicles there is a fixed fee of $300. Cabotage — the provision of transportation services between two plac- es in Uzbekistan by a foreign carrier — is not allowed. Visas for drivers are limited to 12 months for most nationals. Import tariffs on imported cargo vehicles used to be high until recently. These high im- port tariffs posed additional barriers for road carriers to expand their fleets. A resolution introduced by the President in 2021 allows for the duty-free importation of certain trucks, trailers, and semi-trailers. In addition, imports of certain trucks, trailers, and semi-trail- ers from European Union countries are exempt from mandatory certification. These in- centives are scheduled to lapse in January 2025. Intercity passenger transportation by road is regulated, including the pricing of tick- ets. The largest player in intercity coach transportation is UzAutoTrans Service LLC, which is a state-owned company and owns about a third of the market share. There are more than 10 additional private-owned companies offering domestic routes. Licenses for do- mestic transportation can be obtained by any qualifying company. Prices are regulated, with maximum fares set by regional governments. Similar to freight transportation, cab- otage by foreign carriers is not allowed. AIR Air connectivity in Uzbekistan has improved considerably in the last 10 years. Recent policy reforms in the aviation sector have improved access to international markets, both for passengers and shippers. The unbundling of the sector, and more open mar- ket access policies to attract new air carriers and open routes, have improved virtually in all fronts. The country has more than doubled the frequency of international passen- ger flights and the available cargo capacity since 2017. Widebody passenger aircraft ca- pacity (which is well compatible to develop air cargo) and frequency also increased over- all. Additionally, the number of international city pairs connected from Uzbekistan has also expanded twofold, and the number of choices in terms of air carriers has increased even further (figure 3.13). 23 See also CAREC Program (2021). Chapter 3  Strengthening the Linkages between Services and Other Sectors 61 Uzbekistan Airways is the national air carrier and used to be combined with the airport authority, JSC FIGURE 3.13  Air connectivity has grown in terms of UzbekAirports. JSC Uzbekistan Airways was established frequency, cargo capacity, number of carriers, and in 1992 following the breakup of the Soviet Union, tak- the amount of city pairs covered ing over the Uzbekistan operations from Aeroflot. The Growth in air connectivity, international passenger services airline is fully government owned. Until 2019 it belonged (2017=100) to a single entity with JSC Uzbekistan Airports, the op- erator of the national airports. Both companies remain Frequencies/wk fully controlled by the state. JSC Uzbekistan Airways also receives preferential treatment and is exempt from cus- Cargo capacity/wk (tons) tom duties (except for VAT and custom fees) for imports of parts and other equipment.24 Carriers There is little competition from other carriers. There City pairs are no other domestic airlines. The other carriers are all foreign carriers, whose operations are regulated through 0 50 100 150 200 250 300 bilateral air services agreements (BASAs) between Uz- 2016 2023 (only whitebody acft) bekistan and other countries. A regional airline, Silk 2023 Avia, was set up by the government, with the aim of be- ing privatized. Instead, the company was acquired by a Source: World Bank based on OAG. subsidiary of JSC Uzbekistan Airways. There are sever- al “mode 3” (foreign direct investment) restrictions around licensing requirements that may be applied in a discriminatory manner, including requirements for local recognition of pilot licenses, mandating that the main place of activity and aircraft base is within Uz- bekistan, and the requirement of transferring certain regulatory powers to Uzbekistan from the state of original registration. The Ministry of Transport plays a strong role in determining routes, with legislation al- lowing it to influence routes by private carriers. All flights to or from Uzbekistan require permission from the Uzbekistan Civil Aviation Agency under the Ministry of Transport. Legislation specifies that flights by foreign carriers on routes that are also operated by the national air carrier are subject to approval by Ministry of Transport.25 In addition, legis- lation also specifies that only if there is deemed to be “sufficient demand” on a particular route, a line might be operated by several designated carriers.26 There are other aspects that increase ticket prices, including regulated prices for avi- ation fuel. An estimated 30 to 40 percent of the ticket prices are determined by aviation fuel costs.27 There is a monopoly on the provision of aviation fuel, with prices set by the Ministry of Transport, resulting in prices that are higher than world prices. Uzbekistan Airways can buy fuel independently from these arrangements. In addition, a 12 percent VAT is charged on fuel, contrary to the international practice of zero-rated VAT charged to international airlines. 24 Source: Services Trade Policy Database. 25 Point 7 of the Annex to the Order of the Head of the State Inspection of the Republic of Uzbekistan on Surveillance over safety of flights No.144 of 28 December 2009 states that “the performance of international flights by other carriers on routes operated by the main carrier of the Republic of Uzbekistan is considered by the Ministry of Transport.” See also, https://lex.uz/docs/1588106 . 26 Point 8 of the aforementioned Annex. 27 Based on a press conference by Ulugbek Bektoshev, head of the Air Transport Development Department within the Ministry of Transport. https://uza.uz/uz/posts/ samolyet-narkhlari-kimlar-uchun-arzonlashadi-25-11-2019 Chapter 3  Strengthening the Linkages between Services and Other Sectors 62 There are projected benefits to liberalization of the sector. A 2020 World Bank study modelled that liberalization could result in close to a 20 percent reduction in fares (saving US$81 million for air travelers), increase the number of country pair routes by 27 percent, increase traffic by 15 percent, and boost gross domestic product by US$51 million, mostly through increased tourism, trade, and investment.28 WAREHOUSING Until recently, establishing warehousing facilities was subject to extensive licensing re- quirements. These requirements, set by the customs authorities, were lifted in 2020, mak- ing space for modern logistics terminals. Nevertheless, there remain only a few warehous- es and logistics centers that are privately run. There is especially a need for well-equipped warehouses to export perishables such as fruit and vegetables. Restrictions to obtaining land are another constraint for the establishment of ware- houses. There is no private ownership of land in Uzbekistan, although the property built on land can be owned. Land leases cannot exceed 25 years for non-residents, and 100 years for residents. The allocation of non-agricultural land is done through auctions by local authorities, although the process is not always transparent. For logistics centers, it is espe- cially important to be located close to infrastructure (roads and railways) and be able to obtain land rights there. Insecure land rights and difficulties in obtaining them is an important impediment for investment. 28 World Bank, 2020. Building Blocks for Integrated Transport and Logistics Development. Report No: AUS0000970 R 4 APTE C H EXPANDING GLOBAL INNOVATOR SERVICES Chapter 4  Expanding Global Innovator Services 64 THE NASCENCY OF EXPORT-LED GROWTH IN GLOBAL INNOVATOR SERVICES The share of global innovator services in Uzbekistan’s services exports is negligible, especially when compared to countries at similar or lower levels of per capita income. While Uzbekistan’s exports of ICT services have caught up with exports of goods during the last decade (figure 4.1, panel a), the share of global innovator services in Uzbekistan’s services exports is less than 10 percent. This largely conforms to the average for its lev- el of per capita income (figure 4.1, panel b). Unsurprisingly, the corresponding share in many high-income EU countries is higher because the share of knowledge-intensive ser- vices in total services exports rises with per capita in- come. However, many developing economies have suc- FIGURE 4.1  Uzbekistan’s exports of global innovator cessfully diversified their export baskets by specializing services have accelerated in the past decade, but they in a range of IT, professional, scientific, and technical ser- account for a tiny fraction of total services exports vices: computer programming, software development, BPO, accounting, and architectural and engineering ser- a. Uzbekistan total trade volume by sector, 2005 – 2022 (2005 = 100) vices. For example, global innovator services accounted for more than half of all services exports in Costa Rica, 1,200 Ghana, India, Pakistan, and the Philippines — a share 1,000 considerably higher than the average for their levels of 800 per capita income — in 2017. Countries that have lever- aged the potential of services-led growth, such as India 600 and the Philippines, have benefited from the liberaliza- 400 tion of the services sector (see Box 4.1). 200 Global innovator services have provided opportuni- 0 ties for export diversification and gains for specializa- 05 07 09 11 13 15 17 19 21 20 20 20 20 20 20 20 20 20 tion in developing economies through offshoring. This success is attributable, in large part, to the offshoring of Insurance and Finace ICT and professional services to lower-cost destinations. Computer, Communication and Other Services Much like global value chains for manufactured goods, Goods the production of these services is fragmented across Source: Elaboration using World Bank WDI data. countries, such as when preliminary architectural de- signs and tax returns are put together in one country and b. Share of global innovator services in total services exports, finalized and delivered to customers in another (World 2017 Bank 2020b). This labor cost arbitrage is reflected in the 0.9 inverse relationship between the share of cross-border 0.8 delivery (mode 1 trade) in total exports of ICT and pro- Share of services exports, percent fessional services and per capita GDP. Service providers 0.7 in developing economies with English-language skills, 0.6 such as India, the Philippines, and Ghana have particu- DEU 0.5 ITA larly benefited (Nayyar and Davies 2023). MLT FRA 0.4 ROU EST RUS CZE POL SVK The offshoring of global innovator services can be an HUN 0.3 LVASVN important source of better jobs in Uzbekistan. The ex- BGR ARM HRV PRT port of global innovator services through mode 1 trade, 0.2 KAZ KGZ LTU that is digital delivery, is not affected by the geograph- 0.1 UZB AZE GRC GEO ical challenge of Uzbekistan being landlocked. It there- TJK 0 fore presents, in principle, a path to reduce the country’s 6 7 8 9 10 11 12 dependence on physical trade routes and yet diversify its GDP per Capita export basket away from gold, copper, textiles, and agri- cultural goods. Digitalization has provided a new impetus Source: World Trade Organization (WTO) TisMos. Chapter 4  Expanding Global Innovator Services 65 BOX 4.1  Case studies of reforms driving growth in services Examples from other countries have shown that growth in ser- to the entry of both foreign and domestic private providers. The re- vices sectors is possible through pursuing complementary sets forms were embedded in a set of larger reforms of the telecom- of reforms: munications sector, which until the early 1990s were dominated by state ownership, waiting lists, and high costs. The cost of access- India. India has become a global hub for outsourcing IT services ing the internet is now relatively low by international comparison. due to its large pool of skilled and English-speaking workforce and cost-effectiveness, which has been supported by favorable govern- Philippines. In the Philippines, the Business Process Outsourcing ment policies. The exports of ICT services expanded from US$5 bil- (BPO) sector has been an important driver of growth and econom- lion in 2000 to US$144 billion in 2022. In the same period, the share of ic transformation. The country is a global hub for BPO and is the ICT outsourcing as part of total exports of goods and services grew second largest provider after India, focusing mostly on back-of- from 8 percent to 19 percent in 2022 (World Bank WDI). The growth fice functions such as human resources, IT, and finance as well as of the sector was supported by a series of reforms and measures front-office customer support services. The BPO sector is char- that facilitated investment, the regulatory environment, and reduced acterized by high entry rates and is one of the most liberalized sec- red tape around the imports of inputs. Another important related re- tors in the country. The removal of FDI restrictions played an im- form was the liberalization of the telecommunications sector, which portant role in driving the growth of the sector, drawing in large provides crucial connectivity services to the IT sector. These re- amounts of foreign investment. Liberalization of the telecom sec- forms reduced the costs associated with access to the internet due tor has also helped lowering costs in the sector. to the growth of these global innovator services. The share of these digitally deliverable services in total services exports increased steadily between 2005 and 2019 in both devel- oping and advanced economies (Nayyar and Davies 2023). The growth of these services also presents an opportunity for better jobs. The average earnings of workers employed among the global innovator services in Uzbekistan is higher compared to other sectors in the economy (figure 4.2, panel a).29 And these global innovator services have experienced larger average wage increases compared to industry in Uzbekistan (figure 4.2, panel b). FIGURE 4.2  Average wages in global innovator services exceed those in manufacturing and this gap has widened in recent years a. Average monthly earnings in Uzbekistan, by sector, 2019 b. Real wages in selected sub-sectors in Uzbekistan 6 Finance Information and 5 communication Manufacturing 4 UZS, Millions Transportation 3 Wholesale and retail 2 Professional, scientific and technical 1 Arts, entertainment and recreation 0 Accommodation and food 09 17 03 17 09 18 03 18 09 19 03 019 09 20 03 0 09 21 03 021 09 22 2 02 02 0 0 0 0 0 0 0 0 /2 /2 /2 /2 /2 /2 /2 /2 Administrative and /2 /2 /2 /2 03 support 0 500 1,000 1,500 2,000 2,500 Industry Construction ICT 2017 PPP US$ Finance and Insurance Source: International Labour Organization (ILO). Source: Haver Analytics. 29 This reflects, at least in part, a skill premium because the sector employs a share of workers who have com- pleted tertiary education. Chapter 4  Expanding Global Innovator Services 66 Global innovator services also enable exports in other sectors through linkages and in this way supports jobs indirectly in other sectors. As highlighted in Chapter 3, linked services sectors — which includes global innovator services — enable growth in other sec- tors. There are more jobs in global innovator services that enable exports in other sectors than jobs that are associated with direct exports of global innovator services (98,000 jobs against 65,000 jobs, see figure 3.3). Sectors that especially benefit from global innovator services include manufacturing, retail, and administrative and support services. Growth of global innovator services can therefore have multiplier effects throughout the economy. The scale of the challenge for Uzbekistan to expand their presence in the global mar- ket for global innovator services is not insurmountable. The value of Uzbekistan’s digi- tally deliverable exports was only US$265 million in 2019. The Government of Uzbekistan aims to increase the country’s ICT exports to US$5 billion by 2030, which would surpass the current export value of agricultural goods and textiles. This reflects the country’s ob- jective to leverage knowledge-based IT services as the biggest driver of export-led growth after gold. While the growth target may seem ambitious, it represents only a tiny frac- tion of the IT outsourcing market in the United States, which is currently the main des- tination (80 percent of export value in 2022) of Uzbekistan’s ICT exports. United States’ imports of these digitally deliverable services were US$311 billion in 2019. Uzbekistan’s growth potential in the sector could thus be realized by increasing exports to its (currently) biggest destination FIGURE 4.3  Wage costs among global innovator market as well as by entering new markets. In terms of services in Uzbekistan are comparable to India and (wage) cost competitiveness in the sector, Uzbekistan the Philippines is not very different from global powerhouses such as India and the Philippines in the case of ICT services. In Average monthly earnings, 2019 fact, wages for professional, scientific, and technical ser- 500 vices in Uzbekistan are lower than those in India and the Philippines (figure 4.3). 400 The establishment of Tashkent’s IT Park by the Gov- ernment of Uzbekistan represents a launchpad for 300 the country’s global innovator services by strength- US$ ening the 3Cs. The IT Park already has over 1,300 resi- 200 dents employing over 20,000 people. The number of for- eign firms has grown from just 12 in 2019 to almost 200. IT Park residents currently export US$300 million worth 100 of IT services with a target to exceed the one billion US dollar threshold in 2025. The digital connectivity for IT 0 Park residents is world-class. For strengthening capa- ICT services Professional services bilities, Tashkent’s IT Park also runs 200 IT centers, of- UZB IND PHL fers several online courses in mathematics, data science, programming, and artificial intelligence (AI), and op- Source: International Labour Organization (ILO). erates the Digital IT University — the first one in Cen- tral Asia. Contestability is also a factor. Residents pay no value added tax on imported ICT hardware and software. In addition, no work permits are required; investors, IT special- ists, and start-up founders are eligible for IT visas which are valid for up to three years. Firms also have access to a one-stop-shop helping them with tax registration, bank ac- counts, and office space. There are fiscal incentives too, which foreign firms are also el- igible for. Residents neither pay corporate income tax, nor make social security contri- butions. They also receive free rent of an office outside Tashkent for one year, free tech- nical equipment for up to 50 employees, up to 15 percent coverage of salary per employee, and training grants of up to 50 percent. Broader progress on the 3Cs can further improve the sector’s prospects. Chapter 4  Expanding Global Innovator Services 67 RAISING THE POTENTIAL TO COMPETE IN INTERNATIONAL MARKETS Capabilities Uzbekistan’s emphasis on advanced, technical education is developing a relevant skill base. As highlighted in Chapter 2, the share of university graduates in Uzbekistan that com- pleted degrees in STEM-related fields exceeds that in other developing economies in the region as well as peer countries outside the region. The government has developed a comprehensive approach to change curriculums and create specialized institutes so that graduates are not just users but also generators of IT-related knowledge and technologies. More than 50 uni- versities now have specialized IT courses, and 20 universities are wholly focused on IT-related education. The government has also liberalized the higher education sector in the country by allowing the entry of foreign universities, which has created competition and raised stan- dards. About 1.2 million individuals have completed the Government of Uzbekistan’s “One Million Uzbek Coders” training program and over a million more are signed up. The growing emphasis on the English language is also contributing to creating rele- vant skills. English is fast becoming the second language of choice of the 36 million peo- ple, 60 percent of whom are under 30 years old. More than 5 million Uzbeks speak English. Uzbekistan launched the English-Speaking Nation Program in 2017, spending tens of mil- lions of dollars on raising proficiency in the language. The country’s more than 30,000 English language teachers receive US-funded training, and government officials are paid a premium if they speak English. However, the pool of skilled workers needs to be expanded, including through draw- ing on foreign expertise. As highlighted in Chapter 2, with a population almost as large the other four Central Asian countries combined, Uzbekistan can create a sizable pool of skilled workers, but tertiary enrolment rates lag peer countries in the region. To draw on foreign expertise, Uz- FIGURE 4.4  Inadequate worker skills are not a major bekistan has introduced special three-year multiple en- constraint for businesses in Uzbekistan try IT visas while also simplifying the process of obtain- ing residency permits. In addition, one consequence of a. Share of firms identifying an inadequately educated the war in Ukraine has been an influx of highly trained workforce as a major constraint, 2019 IT professionals from Russia and Belarus, driven by sanc- World tions and the exit of global IT companies. In fact, Tash- kent’s IT Park launched its relocation program for these ECA tech migrants backed by local businesses. This reloca- UZB tion program provides credit cards and sim cards, hous- ing assistance, help finding jobs for spouses and registra- 0 5 10 15 20 25 tion of children at schools, as well as a “One Stop Shop” Percent to deal with red tape, recruit personnel, and find offices. b. Share of firms choosing inadequately educated workforce as their biggest obstacle, 2019 Firms, on average, across sectors, report that inad- equate worker skills are currently not a major con- World straint for businesses in Uzbekistan. Only 6 percent ECA of firms in Uzbekistan identified an inadequately ed- ucated workforce as a major constraint to their perfor- UZB mance. The corresponding shares for countries covered 0 4 8 12 16 20 in the World Bank’s enterprise surveys were 24.5 per- Percent cent, on average, in Eastern Europe and Central Asia and 20.9 percent, on average, globally (figure 4.4, panel Source: World Bank Enterprise Survey. Chapter 4  Expanding Global Innovator Services 68 a). Similarly, 8.5 percent of firms in Uzbekistan identified an inadequately educated work- force as the biggest constraint to their performance relative to 19.9 percent, on average, in Eastern Europe and Central Asia and 10.4 percent, on average, globally (figure 4.4, panel b). Connectivity Global innovator services are among the more digital-intensive sectors and therefore depend disproportionately more on digital connectivity. ICT services include a wide range of digital activities, including custom comput- er programming services, software publisher services, FIGURE 4.5  Global innovator services are telecommunications services, Internet publishing, and characterized by higher levels of digital intensity data processing services including cloud computing. These ICT services are very much dependent on other Share of ICT services in total inputs, 2018 ICT services as inputs (figure 4.5). Other global innova- ICT tor services are also relatively ICT services intensive. 30 Arts and This is consistent with evidence from advanced econo- entertainment mies which shows that telecommunications, informa- Finance tion services, business services, computer program- Professional ming services, engineering services, advanced data Administrative analytics, advertising and market research, and R&D and support Wholesale and services are among the main ICT-using sectors. For ex- retail ample, the most data- and software-intensive sectors Other services in the United States are internet and telecommunica- Accommodation and food tions services (Van der Marel 2019). Digital connectiv- Transportation ity therefore matters most for growth opportunities in Manufacturing these ICT-intensive sectors. 0 10 20 30 40 However, the quality of digital connectivity contin- Percent ues to lag. As highlighted in Chapter 2, the coverage of faster forms of mobile internet, such as 4G/LTE, as well as Source: Calculations based on the Input-Output table for Uzbekistan, prepared internet speeds remain low compared to peer countries. by the Statistics Agency under the President of the Republic of Uzbekistan. Contestability Uzbekistan’s ICT services sector is highly restricted on cross-border delivery compared to peer countries and this is largely indicative of data localization requirements. Uz- bekistan’s STRI for IT services is higher than comparator countries, including Colombia, Peru, Kazakhstan, and Viet Nam for mode 1 trade (figure 4.6). Much of this reflects data localization requirements (applied across sectors) in Uzbekistan that impede the ability of foreign service suppliers to transfer data across borders and operate efficiently. This is likely to be particularly restrictive for data-intensive services. Therefore, all entities pro- cessing personal data of Uzbek citizens are required to ensure that the databases which collect, analyze, and store such data be physically located in the country.31 These data-lo- calization requirements have been enforced from time-to-time by blocking access to social 30 Arts, entertainment, and recreation services are the second most ICT service-intensive sector after the ICT services sector itself. 31 Article 27 (1) of the Law “On personal data” 02.07.2019 №547: https://lex.uz/docs/4396428. Resolution of the Cabinet of Ministers “On approving certain normative legal acts in the area of processing of personal data” of 05.10.2022 No.570: https://lex.uz/ru/docs/6225462 Chapter 4  Expanding Global Innovator Services 69 media websites in the country.32 Data-localization requirements have been demonstrated to reduce the total volume of trade in digital services.33 Foreign service suppliers located outside Uzbekistan must utilize data centers in Uzbekistan, thereby making it impossible for foreign companies to operate exclusively online. Lastly, such restrictions may reduce productivity of foreign service suppliers by impeding access to efficient data storage op- tions, such as cloud computing, and disincentivize foreign investment.34 As a result, policy priorities include the implementation of international best practices around data storage and transfers that focus on laws on privacy protection while allowing international trade. FIGURE 4.6  Global innovator services are highly restricted on cross-border delivery Services trade restriction index (STRI), by mode of supply, 2022 a. IT services b. Engineering services 100 100 80 80 60 60 40 40 20 20 0 0 Mode 1 Mode 3 Mode 4 Mode 1 Mode 3 Mode 4 COL KAZ PER VNM UZB COL KAZ PER VNM UZB c. Architecture services d. Accounting services 100 100 80 80 60 60 40 40 20 20 0 0 Mode 1 Mode 3 Mode 4 Mode 1 Mode 3 Mode 4 COL KAZ PER VNM UZB COL KAZ PER VNM UZB Source: WTO-WB Services Trade Policy Database and Services Trade Restrictions Index (STRI). Note: The index scores can be interpreted as follows: 0 — completely open; 25 — virtually open with minor restrictions, 50 — major restrictions, 75 — virtually closed, 100 — completely closed. 32 Uzebkistan Restricts Access to Several Social Media Sites, RadioFreeEurope RadioLiberty (July 3, 2021): https://www.rferl.org/a/uzbekistan-restricts-social-media/31339492.html 33 World Bank, 2021, World Development Report: Data for Better Lives. 34 Mathhias Bauer et al., 2014, “The Costs of Data Localisation: Friendly Fire on Economic Recovery”, ECIPE Occasional Paper (No. 3/2014): https://ecipe.org/wp-content/uploads/2014/12/OCC32014__1.pdf Chapter 4  Expanding Global Innovator Services 70 Uzbekistan’s IT services sector is relatively less restricted in terms mode 3 and mode 4 trade. On mode 3 services trade (reflecting FDI), foreign suppliers that are registered as legal entities are eligible for all benefits in Tashkent’s technological park — created just three years ago — which now hosts more than 650 companies. This includes tax exemp- tions, duty-free access to ICT hardware and software, a special three-year IT visa for inves- tors, one-stop legal registration, as well as office space and accommodation assistance. On mode 4 services trade (movement of natural persons), Uzbekistan has introduced special three-year multiple entry IT visas while also simplifying the process of obtaining residency permits, although there is 15 percent wage subsidy for Uzbek employees in Tashkent’s IT Park. For professional services such as architecture, engineering, and accounting, Uzbekistan is completely closed to cross-border delivery, i.e., mode 1 trade. In other words, commer- cial presence is required for foreign companies to supply these services. For example, per- sons supplying auditing services in the Republic of Uzbekistan must register as a legal entity in the form of a business partnership, society, production cooperative, unitary en- terprise, and any other form envisaged by law, except for a Joint Stock Company. Similarly, architectural service providers for providing design, documentation, and advisory ser- vices are subject to licensing as legal entities incorporated in Uzbekistan. The inflow of foreign capital and foreign expertise faces fewer restrictions among pro- fessional services. As highlighted in Box 3.1, access to capital and financing remains an important constraint for firms. Foreign capital can provide an important source. There are few limits for foreign investment (mode 3) in existing locally incorporated companies, except that foreign shares cannot exceed 49 percent in publicly controlled design engi- neering firms. On mode 4 services trade, there continue to be some restrictions. National employees must be not less than 50 percent of the legal consultants in a consulting legal firm. And if there is only one legal consultant in the firm, she or he must be a national of Uzbekistan.35 Similarly, at least one partner or director in an accounting or auditing firm must be a locally licensed professional. There are exceptions to licensing requirements in order to attract foreign investment and qualified foreign professionals. For example, engineering projects from foreign service suppliers can apply for a “fast track” approval which does not require licensing for engineering design, procurement, and construction projects fully financed from state budgets. 35 The Decree of the President On Measures for fundamental increase of effectiveness of the institution of advocates and expansion of independent advocates No.5441 of 12 May 2018: https://lex.uz/docs/3731058 The Resolution of the Cabinet of Ministers On providing legal consulting services by commercial organizations No. 675 of 17 August 2018: https://lex.uz/acts/3908803 R 5 APTE C H IMPROVING THE GROWTH PROSPECTS OF LOW-SKILLED SERVICES CHapter 5  Improving the Growth Prospects of Low-skilled Services 72 THE POTENTIAL TO IMPROVE THE PRODUCTIVITY OF JOBS Low-skilled consumer services are typically characterized by limited productivity and earning prospects relative to global innovator services, but there is considerable room to catch up with advanced economies. Low levels of labor productivity in low-skilled con- sumer services, relative to global innovator and low-skilled enabling services, is reflect- ed in the preponderance of small enterprises that account for more than 95 percent of all firms in the sector.36 However, low-skilled services are characterized by significantly high- er levels of productivity in higher-income economies where they also employ a sizeable share of the workforce. For example, the gap in labor productivity between Uzbekistan and Russia was the highest among low-skilled consumer services, including hospitality services and (wholesale and) retail trade (figure 5.1). And although these gaps are poten- tially discouraging, they indicate a potential for services in LMICs that is yet unrealized. FIGURE 5.1  The gap in labor productivity between Uzbekistan and Russia was the highest among low-skilled consumer services, including hospitality and retail Average labor productivity gaps relative to Russia (=1.0), 2017 – 2022 Accommodation and food Low-skilled Other services consumer Arts and recreation Wholesale and retail ICT Global Financial and insurance innovator Professional Public administration (incl. def.) Social Education Health and social services Low-skilled Administration and support enabler Transport 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 Source: Elaboration based on Haver Analytics and International Labour Organization (ILO) data. Notes: Labor productivity is estimated as value-added per worker. The labor productivity gap is estimated as a ratio of the value-added per worker in Uzbekistan relative to Russia. Averages are estimated after relative labor productivity gaps have been collected for each year. All value-added data for both Russia and Uz- bekistan are expressed in constant USD. There are growing opportunities for scale and innovation among low-skilled services through trade and technology adoption. Among low-skilled services, transportation and hospitality services are highly traded internationally owing to tourism-related travel and they provide opportunities for export-led growth. Even among non-tradable low-skilled services, such as retail, there are opportunities for businesses to achieve greater scale and innovation than before owing to the emergence of new business models linked to the dif- fusion of digital technologies. We will consider tourism-related transportation and hospi- tality services as well as retail services as examples to illustrate these new opportunities. 36 Based on data from the Statistics Agency under the President of the Republic of Uzbekistan. CHapter 5  Improving the Growth Prospects of Low-skilled Services 73 EXPORT-LED GROWTH IN TOURISM-RELATED SERVICES Travel-related transportation and hospitality services currently account for more than three-fourths of Uzbekistan’s services exports. This conforms to a global trend where low-skilled services make up larger shares of total services exports in countries with lower levels of per capita income (figure 5.2, panel a) and they have enabled several lower-income countries to diversify their exports away from volatile primary sectors. Uzbekistan’s ex- ports of transportation and hospitality services are driven, at least in part, by tourism-re- lated travel. In Uzbekistan, foreign visitors account for more than half of all tourism-relat- ed expenditures across accommodation services, travel agencies, and related reservation services, as well as air transportation services (figure 5.2, panel b). FIGURE 5.2  Tourism-related transportation and hospitality services are central to Uzbekistan’s services exports a. Share of transportation and hospitality services in services b. Share of tourism-related expenditure incurred by foreign exports visitors 1.0 Accommodation services 0.9 GEO Travel agencies and Share of services exports, percent UZB related services 0.8 GRC Air passenger 0.7 transportation TJK KGZ AZE 0.6 Road passenger HRV KAZ transportation LTU 0.5 ARM BGR Railway passenger LVASVN SVK transportation 0.4 PRT ROU CZE EST Food and beverage POL HUN services 0.3 RUS Sports and FRA ITA 0.2 MLT DEU recreational services 0.1 Cultural services 0.0 0 0 10 20 30 40 50 60 70 80 6 7 8 9 10 11 12 Percent GDP per Capita Source: Uzbekistan Statistics Agency under the President of the Republic Source: World Trade Organization (WTO). of Uzbekistan. However, growth in exports of travel-related services has been slow, even relative to other Central Asian countries, despite lower restrictions on the entry of foreign visi- tors. Exports of travel-related services in Uzbekistan have grown slower compared to oth- er Central Asian countries between 2005 – 2015, but there has been some catch-up since then (figure 5.3, panel a). This can be traced to the relatively slow growth in tourist ar- rivals during this period (figure 5.3, panel b). Visa requirements for tourism-related trav- el in Uzbekistan have been simplified for citizens of over 50 countries. There are no visas required for EU nationals while US nationals can obtain e-visas. The government contin- ues its policy on simplifying visa requirements for 101 economically stable and safe states, including through the introduction of electronic visas. The market for tourism-related travel in Uzbekistan is also largely limited to the personal travel segment which, in turn draws on several UNESCO World Heritage Sites in the country.37 The share of business 37 Uzbekistan has more than 7,000 objects of cultural heritage, with 209 of them located in four “open museum” cities, such as “Ichan kala in the city of Khiva”, “Historical center of the city of Bukhara”, “Historical center of the city of Shakhrisabz”, and “Samarkand city”: https://whc.unesco.org/en/statesparties/uz CHapter 5  Improving the Growth Prospects of Low-skilled Services 74 and professional-related travel has declined from 20 percent in 2005 to less than 2 per- cent in 2019. This may be indicative of constraints on “connectivity” and “contestabili- ty” because the demand for business-related MICE (meetings, incentives, conferences and events) tourism is more responsive to the price of travel given the possibility of choosing locations worldwide. FIGURE 5.3  Slow growth in exports of travel-related services tracks the slow growth in the arrival of tourists from abroad a. Exports of travel-related services b. Inbound tourist arrivals 6 14 5 12 10 4 US$, billion 8 MIllion 3 6 2 4 1 2 0 0 05 06 20 7 08 09 10 11 12 13 14 15 16 17 18 19 95 97 99 01 03 05 07 09 11 13 15 17 19 20 0 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 19 20 20 19 20 20 20 20 19 20 UZB Central Asia GEO KAZ KZG ROU TJK UZB Source: UNCTADstat. Source: UN World Tourism Organization. Connectivity There is considerable scope for improving passenger transportation logistics in Uz- bekistan. The number of passengers carried by air transportation services — which is the primary mode of entry for foreign visitors — rela- tive to the size of the economy, declined in Uzbekistan FIGURE 5.4  The number of passengers carried by between 2001 and 2016 (with a marginal increase since) air transportation services relative to the size of (figure 5.4). This is in sharp contrast to other develop- the economy declined in Uzbekistan unlike in other ing economies in the Eastern Europe and Central Asia developing economies in the region region. Passenger connectivity through air travel in Uz- bekistan is hindered by limited providers and a limit- Air transport, passengers carried ed offering of destinations. While Tashkent Airport is 0.010 served by 39 passenger airlines, the only airline provid- 0.008 Percent of GDP ing services in many other cities is Uzbekistan Airways, 0.006 the national air carrier. Rail connectivity remains a na- 0.004 tional monopoly. This reflects gaps in transportation infrastructure across different modes of travel. There 0.002 is a need to attract large international air carriers, in- 0.000 vest in low-cost domestic air transportation, construct 98 00 02 04 06 08 10 12 14 16 18 20 20 20 20 20 20 20 20 19 20 20 new railway lines, expand the use of high-speed electric trains, as well as construct new roads of national and UZB ECA EU regional significance connecting tourist centers. Such Source: International Civil Aviation Organization, Civil Aviation Statistics of the infrastructure investment must leverage public-pri- World and ICAO staff estimates. vate partnerships. Note: ECA refers to Europe and Central Asia excluding high income countries. CHapter 5  Improving the Growth Prospects of Low-skilled Services 75 Contestability The lack of competition in the air transportation sector is pricing out travel-related services. For passenger transportation services, as highlighted in Chapter 2, high airline prices make Uzbekistan less of a tourist destination. High airline prices are associated with the state-owned Uzbekistan Airways having a national monopoly. There are few trade restrictions among accommodation and food services. Uzbeki- stan’s hospitality services subsector has fewer restrictions on foreign direct investment compared to peer countries (figure 5.5). Several world-renowned hotel chains have es- tablished their presence in Uzbekistan. This includes the Hyatt Regency, Lotte City Hotel, Hilton, Interconti- FIGURE 5.5  Among hospitality services, there are nental, Marriott, and Radisson across the cities of Andi- few trade restrictions on accommodation services, jan, Urgench, Tashkent, and Jizzakh. However, estab- but the opposite is true for the services of tour lishing hospitality services remains challenging due to operators, agents, and guides laws around land ownership. Obtaining land leases can be a lengthy and complicated process — as land owner- STRI, tourism-related services ship is restricted — and leases on land are subject to re- 100 newal as explained in Chapter 2. 80 Tour agents and tour operators are subject to partic- ularly stringent licensing requirements that impede 60 competition.38 Foreign tour operators/agents can’t pro- vide cross border services in Uzbekistan without register- 40 ing as a legal entity; i.e., Uzbekistan is completely closed to mode 1 trade in these services (figure 5.5). However, 20 foreign tour agencies that register in Uzbekistan as a le- gal entity (via incorporation with the local company) can 0 work business-to-business, although they cannot provide Accommodation, Travel Agencies, Tourist Guides, services directly to consumers (as it is a competition for mode 3 mode 1 mode 4 local tour agents). There are no restrictions for foreign COL KAZ PER VNM UZB natural persons to work, practice, consult for tour op- erators if they have the right to work, but only through Source: World Bank and World Trade Organization. employment with local tour companies.39 In addition, providing tour guide services is restricted to Uzbekistan residents. For those foreign na- tionals who are resident it is difficult to comply with the licensing requirements, which include prior local diplomas (middle school or higher institution and additional courses on guides/excursion) and requirements for all courses and examinations to be taken in the Uzbek language (Chapters 2, 3, 4 of Annex 9 of the Regulation).40 38 Annex 5 (tourism activity) to the Resolution of the Cabinet of Ministers No. 80 of 21.02. 2022 “On uni- fied procedures of licensing certain types of activities via special electronic system”: https://lex.uz/ru/ docs/5870213 ) 39 Annex 20 (Permits for work including foreigners) to the Resolution of the Cabinet of Ministers “On Unified procedures for issuance of certain permission documents via special electronic system” of 22.02.2022 № 86: https://lex.uz/ru/docs/5876002 40 The Law on tourism, Annex 5 ( tourism activity) of 18.07.2019, № 549;: https://lex.uz/docs/4428101 Resolution of the Cabinet of Ministers No. 80 of 21.02. 2022 “On unified procedures of licensing certain types of activities via special electronic system”: https://lex.uz/ru/docs/5870213; Annex 9 ( Regulation on the pro- cedure for issuing a qualification certificate to a guide-interpreter, lead tour guide and instructor-guide) to the Resolution of the Cabinet of Ministers “On measures to create favorable conditions for development and rehabilitation of the sphere of tourism in Uzbekistan” of 10 July 2020, № 433: https://lex.uz/ru/docs/4937140 CHapter 5  Improving the Growth Prospects of Low-skilled Services 76 THE USE OF TECHNOLOGIES IN LOW-SKILLED (NON-TRADABLE) CONSUMER SERVICES There are possibilities to increase the productivity of low-skilled non-tradable services through greater scale and innovation. Low-skilled services, such as retail trade, that are neither directly exported nor indirectly exported through linkages with tradable sectors can still benefit from international trade through FDI inflows. FDI can change business mod- els in these low-skilled services by operating a larger scale, thereby increasing productivi- ty. The use of digital technologies is also associated with higher levels of labor productivity in the retail services sector. Online platforms and mobile applications reduced the costs of searching for, matching, and tracking information, e.g., food or grocery delivery and ride- sharing through Yandex and digital payments through startups such as Uzum and Click. Similarly, basic software and mobile phone apps have enabled small or informal firms in the retail sector to improve their input sourcing, inventory management, product pricing, and payment systems. For example, Billz provides mobile phone-enabled software solutions for accounting, client management, loyalty, and cashback management to retail store businesses. The demands on worker capabilities to use these technologies are not stringent. Not every- one using a smartphone needs to know how to code, but they do need basic cognitive skills such as literacy, numeracy, and familiarity with digital technologies starting at a young age. Contestability FIGURE 5.6  Restrictions on foreign direct investment Uzbekistan’s relatively low restrictions on foreign di- in retail services in Uzbekistan are low even rect investment in retail services provides an oppor- compared with high-income countries in the region tunity for productivity gains through the establish- Services Trade Restrictiveness Index (STRI), Retail services, ment of modern business models. For retail services, Mode 3 trade restrictions in developing economies are most com- AUT monly applied through limits on FDI. FDI has played an BIH important role in expanding larger-scale retail; the 100 CZE DNK largest global retailers operate, on average, in 12 coun- FIN tries (Bronnenberg and Ellickson 2015). Compared with FRA DEU small, informal corner stores, these chain stores achieve GRC scale not only through larger establishments but also HUN through establishments in multiple locations. These large ISL IRL chains can also negotiate higher discounts from suppli- ITA ers through bulk purchases. The reallocation of market KAZ share from small-scale retail stores to larger supermar- LVA LTU kets has been a major source of productivity gains in the MNE United States (Foster, Haltiwanger, and Krizan 2006). NLD MKD This expansion of large-scale retail through FDI has been NOR associated with productivity gains in developing econo- POL mies too. For example, foreign entry of supermarkets in PRT RUS Mexico significantly lowered prices (Iacovone et al. 2015; SRB Atkin, Faber, and Gonzalez-Navarro 2018). Similarly, re- ESP SWE tail multinational companies in Romania had productiv- CHE ity-enhancing impacts on local suppliers and pay high- TUR er wages than domestic retailers (Javorcik and Li 2013). UKR GBR Uzbekistan stands poised to benefit from such FDI giv- UZB en its low restrictions on “commercial presence” in re- 0 10 20 30 40 50 60 tail services compared with both high- and middle-in- come countries in the region (figure 5.6). Source: World Bank and World Trade Organization. CHapter 5  Improving the Growth Prospects of Low-skilled Services 77 Capabilities Uzbekistan’s sizable pool of middle-skilled workers places it in a good position to adopt basic digital technologies, although digital literacy needs greater emphasis from an early age. While digitalization places the improvement of workforce skills at the forefront, the needed skills are not necessarily “high end.” The ability to use smartphones and the internet relies on foundational cognitive skills, such as literacy and numeracy. The near universal completion of secondary schooling in Uzbekistan, provides the foundation for building these skills (figure 5.7, panel a). This near universal completion of secondary schooling is reflected in the education levels of workers employed across Uzbekistan’s services sector, including in low-skilled services such as retail.41 However, digital litera- cy remains incomplete (figure 5.7, panel b). Exposing children at a young age to basic dig- ital technologies, such as how to use email and word-processing software, while also en- couraging lifelong learning is important here. FIGURE 5.7  Uzbekistan’s secondary school enrolment rates are near universal but digital literacy is far from complete a. Secondary enrolment rates (gross) b. Percentage of population with basic ICT skills ARM 50 AZE 45 GEO 40 IND KAZ 35 KGZ 30 LMC Percent 25 OED PHL 20 RUS 15 UMC UZB 10 VNM 5 0 10 20 30 40 50 60 70 80 90 100 110 0 Percent AZE GEO KAZ PHL RUS UZB VNM Female Male Total Source: International Telecommunications Union (ITU). Notes: Data is based on an average of 4 ITU indicators. These indicators in- Source: World Bank, World Development Indicators. clude “Using copy and paste tools within a document”, “Transferring files be- Notes: Data period is for 2021 excluding Kazakhstan and Russia where latest tween a computer and other devices”, “Sending e-mails with attached files”, data available is for 2020 and 2019, respectively. LMC and UMC are lower and and “Transferring files between a computer and other devices”. The data upper middle income country aggregates. OED is OECD aggregate. ISO 3-digit is based on the latest data period available for each country, which covers codes are reported for countries. 2018 – 2022. ISO 3-digit codes are reported for countries. School curricula should also emphasize socioemotional and interpersonal skills. Be- yond digital literacy, socioemotional and interpersonal skills play an especially important role in low-skilled services, such as retail, that are characterized by a high degree of cus- tomization and the simultaneity of production and consumption that necessitates a close relationship with consumers. It is precisely these skills that slow down the automation of 41 Based on ILOstat. CHapter 5  Improving the Growth Prospects of Low-skilled Services 78 waiters in restaurants or hosts at event venues. The intangibility of many services, which often precludes the writing of complete contracts, also emphasizes these interpersonal skills where trust between the supplier and the buyer is crucial. Connectivity The extent of unexploited potential here is underscored by the low use of even the most basic digital technologies in Uzbekistan. For example, the share of firms in low-skilled services that use a website to communicate or transact with customers is around 20 per- cent. This is lower than all other countries in the region. It is also considerably lower than the average for its level of per capita income. The comparison with the Kyrgyz Republic is illustrative, where at even at a lower level of per capita income, the share of enterprises using websites in low-skilled services is as high as 60 percent (figure 5.8, panel a). The use of online platforms in Uzbekistan is more consistent with its level of per capita income with respect to digital payment systems that are extremely relevant for small retailers and other informal enterprises in low-skilled services. However, at around 40 percent, the share of individuals making or receiving digital payments is lower than several countries at similar levels of per capita income (figure 5.8, panel b). FIGURE 5.8  The use of basic digital technologies is more widespread in certain business functions a. Share of low-skilled services firms with their own website, b. Individuals making or receiving digital payments, 2021 latest available year 2009 – 2021 100 100 NLD DNK FIN IRL 90 90 BEL AUT SWE RUS SVN CZE LUX 80 80 GRC SVK KAZ Percentage of individuals who made EST or recieved a digital payment, 2021 HUN SRB HRV CYP Own website, percent 70 70 BLR LVA TUR KGZ BIH ALB AZE PRT GEO 60 MKD POL 60 UKR TUR RUS 50 ITA KAZ ROU MDAGEO MNE 50 BGR ARM 40 PHL 40 KGZ UZB 30 TJK UZB TJK IND 30 20 LTU 10 20 0 10 5 6 7 8 9 10 11 12 0 GDP per capita (logs) 6 7 8 9 10 11 12 Source: Calculations based on World Bank Enterprise Surveys. GDP per capita (logs), 2021 Notes: The World Bank Enterprise Survey only includes firms with 5 or more employees. Uzbekistan data relates to 2019. Source: World Bank, WDI and Global Findex Database. The low shares of digital technology use in low-skilled services may reflect gaps in the availability of affordable internet service, as well as information and financial con- straints. Unlike global innovator services which tend to agglomerate in large cities and clusters such as the Tashkent IT Park, low-skilled services are non-tradable and there- fore dispersed across the country including in remote areas where internet connectivity is weaker (figure 5.9, panel a). There might also be information gaps among small enterpris- es in these services where management practices might be few and far between. Business owners need to know how to take advantage of the potential that new technologies bring, and policy support can help overcome the information gaps on the returns to technolo- gy acquisition. However, not all small informal enterprises have the capabilities to take CHapter 5  Improving the Growth Prospects of Low-skilled Services 79 advantage of relevant training and other business advisory services. Learning from in- dustry leaders or larger enterprises that geographically proximate has been shown to have effects in other countries. The lack of access to finance is also likely to be a constraint for small and micro enterprises to invest in these technologies. In Uzbekistan, even the own- ership of mobile phones, which is the basic requisite for using digital apps, is not univer- sal (figure 5.9, panel b). FIGURE 5.9  Access to mobile internet is relatively low, especially in rural areas a. Share of individuals using the Internet by location, 2021 b. Share of individuals who own a mobile phone, 2021 100 ARM RUS GEO KAZ 90 Percentage of individuals who AZE AZE own a mobile phone RUS 80 VNM UZB UZB 70 GEO 60 KAZ 50 0 10 20 30 40 50 60 70 80 90 100 40 Percent 6 7 8 9 10 11 12 Urban Rural GDP per capita (logs) Source: International Telecommunications Union (ITU). Source: International Telecommunications Union (ITU). Notes: ISO 3-Digit codes are reported for countries. Notes: ISO 3-digit codes for individual countries are displayed. R 6 APTE C H KEY RECOMMENDATIONS Chapter 6  Key Recommendations 81 The services sector is Uzbekistan can better contribute to growth and jobs by improv- ing its linkages with other sectors, expanding global innovator services, and improv- ing the productivity of low-skilled services. First, a range of services provide important inputs for the rest of the economy, including goods producing sectors. Improving these linkages between enabling services such as telecommunications, transportation, and pro- fessional services and other sectors such as agriculture and manufacturing can facilitate gains from trade in activities where Uzbekistan has a comparative advantage. Second, a shift in the composition of Uzbekistan’ services sector towards the global innovator ser- vices can help the country reap the benefits of trade and innovation associated with ICT and professional services. Third, even with economic diversification, a sizeable share of Uzbekistan’s labor force will continue to be employed in low-skilled services where digi- tal technologies are bringing new growth opportunities. Improving the contestability of key enabling services is fundamental to maximizing the impact of the services sector on economy-wide productivity. Telecommunication and transportation services that enable a range of downstream economic activity are stifled by regulatory restrictions and the preponderance of state-owned enterprises in Uzbekistan. Improving competition is therefore of utmost importance, such as through the removal of the international gateway monopoly of Uztelecom and phasing out the privileges af- forded to JSC Uzbekistan Airways. Connectivity also matters, such as through greater public-private partnerships to increase investments in roads and warehousing facilities. Consistent progress on all the 3Cs is important for expanding global innovator ser- vices. As data-intensive sectors, improvements in the coverage, speed, and affordability of broadband internet in Uzbekistan is an essential prerequisite. The lack of contestabil- ity in the cross-border delivery of these services, largely due to data localization require- ments in Uzbekistan, is an additional constraint. The stock of Uzbekistan’s capabilities is reasonably good, but there needs to be a concerted effort to bolster tertiary education rates and strengthen management practices in large firms. Connectivity is key to capturing productivity gains in low-skilled consumer services. Improvements in transportation connectivity is a prerequisite for tourism-linked hospi- tality services, while improvements in digital connectivity can bring productivity gains to non-tradable services such as retail. Rates of secondary education completion are near universal in Uzbekistan, but capabilities matter to the extent that digital literacy remains weak. Contestability also matters in particular segments of hospitality services, owing to restrictions on land ownership. Unleashing the potential of the services sector will require structural reforms that im- prove contestability across different services markets. In many cases this means level- ing the playing field. For many of the enabling services sectors, this requires a rethink of the role of the state in the sector as there is a large presence of businesses with state own- ership. For global innovator services, increased digitization requires a rethink of data reg- ulations to allow cross-border provision of such services. For low-skilled services, tourism provides an opportunity, but reforms around land restrictions and cross-border delivery are needed to encourage growth in this sector. Table 5.1 summarizes key policy recommen- dations by sector, based on the sectoral deep-dives presented in this report. Chapter 6  Key Recommendations 82 TABLE 6.1  Policy recommendation along the dimensions of capabilities, connectivity, and contestability Objective Policy recommendations Strengthen linkages Capabilities between enabling • Investments in secondary education to emphasize socioemotional and interpersonal skills in school services and other curricula. sectors • Vocational training for standard IT skills. Key sectors: • Align standards more closely with international standards to encourage more entry of foreign Transportation businesses outside the immediate region. and logistics, telecommunications Connectivity • Investments in infrastructure to bolster transportation and digital connectivity. (SEE CHAPTER 3) • Regulatory reforms to improve customs procedures, the tracking and tracing of consignments, as well as the timeliness of shipments reaching their destination. Reforms that bolster private participation in transportation and telecommunication services can also improve connectivity. Contestability Telecom: • Remove the international gateway monopoly of Uztelecom; provide more competitive wholesale prices. • Establish an independent regulator. • Facilitate licensing arrangements for providers, including moving to a notification procedure rather than the current approval procedure. Transportation: • Air: Increase competition of routes through gradual liberalization of the sector; rethink privileges afforded to JSC Uzbekistan Airways. • Road: Re-assess quota system; facilitate operations of foreign transportation providers. • Rail: Complete the unbundling of track infrastructure and passenger and freight service provision; increase competition on freight markets, starting with reducing the influence of the “master” freight forwarders • Warehousing: Expand opportunities for private sector firms to establish warehouses and logistics centers, including facilitating the establishment of warehouses near transportation hubs. Expand the footprint of Capabilities global innovator services • Investments in higher education that increase tertiary enrolment rates can enable a sizable pool of Key sectors: skilled workers over the medium term. IT, professional services, • Vocational training to accelerate the development of advanced ICT skills, such as through the financial services Government of Uzbekistan’s “One Million Uzbek Coders” training program as well as fewer restrictions on work visas for highly skilled workers from abroad, such as in Tashkent’s IT Park. (SEE CHAPTER 4) Connectivity • Investments to improve the quality of broadband connectivity through more widespread coverage of faster forms of mobile internet, such as 4G/LTE. Contestability • Reduce restrictions on cross-border delivery through relaxing data localization requirements while striking a balance with privacy considerations. Increase the productivity Capabilities of low-skilled services • Investments in secondary education to emphasize socioemotional and interpersonal skills in school Key sectors: curricula. Retail, hospitality, personal • Vocational training for standard IT skills. services Connectivity (SEE CHAPTER 5) • Investments to improve access to broadband connectivity in more remote areas. Contestability • Simplify the process of obtaining land leases and reduce restrictions on land ownership. Source: World Bank, based on findings in this report. 83 References Aguiar, Angel, Maksym Chepeliev, Erwin Corong, and Central Asia Regional Economic Cooperation Dominique van der Mensbrugghe. 2022. The GTAP [CAREC] Program (2021). Railway Assessment for Data Base: Version 11. 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Washington, DC: ufacturing firms: Evidence from Ukraine,” Policy World Bank Research Working Paper Series 5944, Washington World Bank. 2024. Uzbekistan: Country Economic Mem- DC: The World Bank. orandum. Washington, DC: World Bank. 85 ANNEX FOR CHAPTER 1:  DECOMPOSITION METHODOLOGY DECOMPOSING CHANGES IN ANNUALIZED VALUE-ADDED PER CAPITA Changes in aggregate value added per worker between periods t0 and t1 can be decomposed as (see McMillan and Rodrik, 2011): n n ∆w = ∑ ∆w i × θto i + ∑ ∆θ i × wt1 i i=1 i=1 Where: ∆w =  Change in value added per worker ∆w i =  Change in value added per worker in sector i θto i =  Share of employment in sector i in total employment, year t0 ∆θi =  Change in share of employment in sector i in total employment wt1i =  Value added per worker in sector i in year t1 The first term is the sum of changes in value added per worker in sector i, i = 1... n. The Second term can be inter- preted as the change in value added per worker due to inter-sectoral employment changes (i.e., net movements of workers between sectors). This equation only estimates the static effects as it only considers the differences in pro- ductivity level across sectors, without any consideration on how productivity growth differs. The inter-sectoral reallocation (i.e., structural change) can therefore be further decomposed into a “static” and a “dynamic portion” (see de Vries et al., 2015): ∆w i = wt1 i – wt0 i  and ∆θ = θt1 – θt0 i i i n n n ⇒ ∆w = ∑ (wt1 i – wt0 i ) × θt0 i + ∑ (θt1 i – θt0 i ) × wt0 i + ∑ (wt1 i – wt0 i ) × (θt1 i – θt0 i ) i=1 i=1 i=1 Within-Sector Static Reallocation Dynamic reallocation Where: ∆w =  Change in value added per worker wt0 i =  Value added per worker in sector i in year t0 wt1 i =  Value added per worker in sector i in year t1 θt0 i =  Share of employment in sector i in total employment, year t0 θt1 i =  Share of employment in sector i in total employment, year t1 “Static reallocation” shows that workers are moving to sectors with higher productivity growth regardless of wheth- er it is rising or falling. “Dynamic reallocation” measures the joint effects of changes in employment and sector productivity growth. “Dynamic reallocation” is positive if workers are moving to sectors with positive produc- tivity growth. Annex for Chapter 1:  86 DECOMPOSING SECTOR CONTRIBUTIONS TO VALUE-ADDED GROWTH Each sector’s contribution to Value-added Growth is calculated as growth of employment/value-added in each sector, i, times its average share in total employment/value-added evaluated at the mid-point between the begin- ning (t1) and the end (t2) of the period considered: 1 — Yt1i t1–t0 Yt0 i Yt1 i Yt0,t1 i = – 1 × 0.5 × + Yt0 i Yt0 Yt1 Y = {V} Where: — Yt0,t1 i = Growth of value-added in sector i, between t0 and t1 Yt1 = value-added in sector i in year t1 i Yt0 i = value-added in sector i in year t0 Yt0 = Total value-added in year t0 Yt1 = total value-added in year t1 DECOMPOSING CHANGES IN EMPLOYMENT (USING LABOR FORE EMPLOYMENT RATE) — SHAPLEY METHOD Decomposing Changes in Employment per Labor Force Employment Rate – by Sector. To understand way in which each sector contributed to the change in employment rate, we can decompose the employment rate: E =∑n Ei L i=1 L Here, E is the total employment, E i is the total employment in sector i, and L is the total labor force. Then it is straight forward to obtain how changes in employment rate ΔE, is decomposed. This is given by: ΔE = ∑n ΔE i ΔL i=1 ΔL Where,ΔE is the change in total employment, ΔL is the change in total labor force, and ΔE i is the change in total em- ~ ΔE ~i ΔE i ployment in sector i. One can interpret E ΔL as the employment rate and E ΔL as the employment rate in sector i.