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JUNE 2013 • Number 119
Changing for the Better:
The Path to Upper-Middle-Income Status in Uzbekistan
Eskender Trushin and Francisco G. Carneiro
As a low-middle-income country with a gross domestic product (GDP) per capita of US$1,715 and a population of 30
million (nearly half of all of the Central Asian population), Uzbekistan has seen stable economic progress since the
mid-2000s, both in terms of growth and poverty reduction. Growth has averaged 8 percent per year since 2004 and
extreme poverty has declined from 27 percent in 2000 to 15 percent in 2012. Encouraged by this outstanding growth
performance, the Uzbek authorities have set an ambitious goal for the country—to join the group of upper-middle-income
countries by 2030. This note discusses the main challenges that the government is likely to face and the structural trans-
formations that the economy will have to undergo to achieve this objective.
What Has the Uzbek Economy Achieved over the last 20 years has been the gradual change in the struc-
in the Last 20 Years? ture of the economy away from agriculture (mainly cotton) in
the late 1990s toward a greater reliance on industry and ser-
Over the past 20 years, Uzbekistan has followed a unortho- vices by 2012. The export and import structures also changed
dox economic development model based on an import-substi- dramatically over the last 20 years as the economy diversified.
tution strategy and a considerable state presence in the econ- The share of noncommodity exports (for example, cars,
omy. With limited integration into the global economy and trucks, fertilizers, plastics, and foodstuffs) expanded from 10
prudent macroeconomic management, the Uzbek economy percent in total exports in 1992 to 23 percent in 2012. The
grew strongly over the past decade and showed resiliency dur- import structure has also diversified, with a shift away from
ing the global financial crisis. GDP growth averaged 8 percent food and energy in 1992 to mainly capital goods and raw ma-
per year over the period 2004–12, while GDP per capita grew terials (machinery, equipment, and chemicals) related to pub-
on average 6.4 percent per year over the same period. Benefit- lic investment projects (figure 1). In addition, trading part-
ing from rising international prices for its commodities and ners have also been diversified geographically, that is, away
favorable terms of trade, Uzbekistan increased its exports of from the Russian Federation—from 55 percent of trade in
commodities selectively (gold, gas, and cotton) to select mar- 1992 to 29 percent in 2012—to other Commonwealth of In-
ket destinations. dependent States (CIS) countries, which was 18 percent in
As income per capita doubled in real terms in less than a 2012, of which Kazakhstan’s share was 11 percent, China’s
decade, absolute poverty was almost halved and declined was 12 percent, the Republic of Korea’s was 8 percent, the Eu-
from 27 percent in 2000 to about 15 percent in 2012. One of ropean Union’s was 7 percent, Turkey’s was 5 percent, and
the most visible structural transformations in Uzbekistan Afghanistan’s was 4 percent, among other destinations.
1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK
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Figure 1. Structural Changes in the Uzbek Economy over the Last 20 Years
a. GDP structure b. Poverty and GDP per capita
100 2,000 30
27.7 27.2
1,800 25.8
24.9
1,715
8 8 8 27.5
9 10 9 9 25
GDPper capita, current US$
23.6
15 12 12 13 14 11 1,600 poverty rate 1,547
poverty, % of population
80 1,384
1,400 21.8
19.5
20
1,200 17.7
1,182
GDP structure (%)
39 38 38 38 39 39 43 44 43 45 41 1,000 15.9 15
60 37 37 1,023 15.0
800 832
GDP per capita 643 10
600 700
623
558 547
6 5 5 5 6 400 465 5
40 7 5 5 6 6 457 396
6 7 6 383
200
14 14 15 17 21
14 22 24 0 0
21 24 24 24 24
20
98
99
00
20 1
02
20 3
04
06
20 7
20 5
08
20 9
10
*2 1
2
0
0
0
0
0
1
01
19
19
20
20
20
20
20
20
20
28 30 31 29 27 25
24 22
19 18 18 18 17
0
00
02
04
06
08
10
12
20
20
20
20
20
20
20
net taxes industry construction
services agriculture
c. Export structure d. Import structure
100 100
2 6
8 9
13 7
6
14 7
4
2 19
2
6 9
6
38
percent
percent
50 50
43 46
7
65
7
8 10 8
9
10
15
9 5
0 0
1992 2012
1992 2012
services machinery & equipment services food
other (for example, gold) metals (for example, copper) other machinery &
(for example, textiles) equipment
energy (for example, gas) chemicals
energy metals
food cotton �?ber (for example, oil) chemicals
Source: Author’s own calculations based on official Uzbekistan statistics.
What Additional Structural Transformation gic choices that would put Uzbekistan on the path to be-
Will Be Needed? come an industrialized upper-middle-income country by
2030. This implies that the economy will have to grow on
The Uzbek authorities have started to articulate a long-term average at 6 percent per year for the next 17 years to achieve
vision; the main objective of the vision is to define the strate- a GDP per capita of $4,900 by 2030. This is an ambitious
2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK
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goal; there are very few countries in the world that have man- veloped infrastructure, a stable macroeconomic environment,
aged to sustain such high rates of economic growth for such and a healthy and well-educated labor force. Countries at this
an extended period of time. Out of 101 middle-income coun- stage usually have a GDP per capita of less than US$2,000.
tries in 1960, mostly located in Europe, only 10 became high- Significant structural transformation will take place as the
income countries by 2008. The majority of other countries country moves up the development ladder from a factor-driven
have fallen into the “middle-income trap.�? to an efficiency-driven economy. At this transition stage, with
At the same time, Uzbekistan’s ambitions are commend- GDP per capita between US$2,000 and US$3,000, a country
able because prosperity will bring about better opportunities becomes more competitive and productivity and wages will
not only for businesses, but also and most importantly for its rise with advancing development. Countries then achieve the
people. But it is important to understand the steps that will efficiency-driven stage of development, where GDP per capita
need to be climbed at each stage of development. The World reaches a higher threshold between US$3,000 and US$9,000,
Economic Forum (WEF) provides a useful framework to un- and they must begin to develop more efficient production pro-
derstand these different stages (WEF 2012). In this frame- cesses and increase product quality because wages have risen
work, in the first stage, the economy is factor driven and coun- and they cannot increase prices. At this point, competitiveness
tries compete based on their factor endowments—primarily is increasingly driven by higher education and training, effi-
unskilled labor and natural resources. Firms compete on the cient goods markets, well-functioning labor markets, devel-
basis of price and sell basic products or commodities, with oped financial markets, the ability to harness the benefits of
their low productivity reflected in low wages. Maintaining existing technologies, and a large domestic or foreign market.
competitiveness at this stage of development hinges primarily Finally, as countries move into the innovation-driven stage,
on well-functioning public and private institutions, well-de- where GDP per capita reaches levels in excess of US$17,000,
Figure 2. Competitiveness and Different Stages of Development
Stages of development
Stage 1: Transition from Stage 2: Transition from Stage 3:
factor driven stage 1 to stage 2 efficiency driven stage 2 to stage 3 innovation driven
GDP per capita (US$) thresholds* < 2,000 2,000–2,999 3,000–8,999 9,000–17,000 > 17,000
Weight for basic requirements
60 40–60 40 20–40 20
subindex (%)
Weight for efficiency enhancers
35 35–50 50 50 50
subindex (%)
Weight for innovation and
5 5–10 10 10–30 30
sophistication factors subindex (%)
basic requirements
key for
• institutions
• infrastructure factor-driven
• macroeconomic environment economies
• health & primary education
ef�?ciency enhancers
• higher education & training key for
• labor market ef�?ciency ef�?ciency-driven
• �?nancial market development
• technological readiness economies
• market size
innovation and sophistication key for
factors
innovation-driven
• business sophistication
• innovation economies
Source: WEF 2012.
3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK
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wages will have risen by so much that businesses will be able to fectiveness are likely to have the highest impact on economic
sustain those higher wages and the associated standard of living growth in Uzbekistan because an increase of 1 percentage
only if their businesses are able to compete with new and point in the government effectiveness indicator would lead to
unique products. At this stage, companies must compete by an additional 2 percentage points of real GDP growth. The
producing new and different goods, using the most sophisti- government should also give consideration to promoting fur-
cated production processes and by innovating new ones. ther trade liberalization in the economy since currency ex-
change liberalization introduced at the end of 2003 had a
Where Is Growth Likely to Come From?
strong positive impact on growth.
Since 1996, the government of Uzbekistan has been promot-
ing an import-substitution strategy heavily driven by state in- How Will a Changing World Affect a
vestments. This strategy has been implemented through state Changing Uzbekistan?
support often channeled through directed credit to state-
owned or state-controlled enterprises (SOEs), high import In an increasingly multipolar world, a new phenomenon is
duties and excises, and through nontariff barriers such as for- emerging: developing country growth has steadily diverged
eign exchange control and an overvalued official exchange rate from advanced economy growth since the late 1990s, reflect-
for import of SOE’s capital goods. While this policy has ing improved policy frameworks. Over the next two decades,
proved highly effective in maintaining high rates of economic the international development environment will change and
growth so far, the question is, how much longer can this eco- will be much different from that of the past decades. Growth
nomic model be sustained? will be increasingly driven by Eastern investors and less so by
Econometric analysis suggests that additional attention Western consumers. The world will continue to witness more
should be on improvements in government effectiveness and dramatic changes in coming decades, including developing
private investment (table 1). Improvements in government ef- countries’ role in the global context, the emergence of new
growth poles and intensified links among developing coun-
tries, and further sectoral shifts within developing countries.
Table 1. Uzbekistan: Two-Step Least-Squares Regression Led by the fast-growing emerging economies, devel-
of GDP Growth (1998–2012) oping countries contributed two-thirds of global
growth in the past five years with rising intra–devel-
Dependent variable: GDP growth
oping country trade. Notwithstanding their rising
Growth of private .080* .098*** .034* .106*** global weight, emerging economies remain develop-
investment (.048) (.035) (.019) (.026) ing countries that continue to face major develop-
Growth of government .045* .038*** .004 .033*** ment challenges. The case of Uzbekistan is no differ-
investment (.025) (.014) (.013) (.010) ent, and progress in economic and living standards
will require not only a good understanding of how
Government 1.288** 2.072***
effectiveness a
(.560) (.309) Uzbekistan is likely to be affected by a changing glob-
al environment, but also policy and institutional re-
-.024* -.027*** forms to foster the required structural economic
Terms of trade
(.014) (.010)
transformation.
Trade liberalization 2.947*** 3.186* 3.697*** 3.697*** Uzbekistan will need to ensure accessibility to
dummy since 2004 (.595) (.318) (.349) (.234) key trade partners in a competitive way. As the World
1.474* -.691 -.544* Development Report 2009: Reshaping Economic Geog-
Growth of labor force
(.861) (.552) (.283) raphy (World Bank 2008) illustrates, Eurasia (ex-
cluding Russia) is a region with low density, long dis-
3.825*** 2.118 7.009*** 9.619***
Constant tances, and many divisions. Uzbekistan also has these
(.241) (1.396) (1.878) (.786)
problems, and is now largely geographically and eco-
Wald chi^2 396.7 637.1 585.9 957.9
nomically isolated from the world’s most dynamic
R-squared 0.95 0.97 0.96 0.987 centers and cannot benefit from increased integra-
Source: Authors’ own calculations. tion with high-income countries, or witness the
Notes: Instruments are years and export price index, instrumented (endogenous) variables are growth emergence of urban centers that reinforce economic
of private and government investment, number of observations is 13. The heteroskedastisity robust
standard errors are reported in brackets with significance levels: *** - 1%, ** - 5%, * - 10%. diversification and house large numbers of consum-
(a) The Government Effectiveness variable captures perceptions of the quality of public services, the
quality of the civil service and the degree of its independence from political pressures, the quality of
ers and producers. In this context, to increase its
policy formulation and implementation, and the credibility of the government’s commitment to such chances of participating competitively in world mar-
policies. (see The Worldwide Governance Indicators (WGI) dataset available at http://info.worldbank.
org/governance/wgi/resources.htm#intro)
kets, Uzbekistan needs to consider ways to develop
4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK
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institutions that could help it become more integrated with sidies through directed credit, high trade protection, and
the global economy (World Trade Organization [WTO] acces- other measures may not be feasible under WTO rules. Ease of
sion; strengthening the rule of law and property rights; and doing business, particularly in terms of institutional and in-
reviewing logistics impediments for intra- and interregional frastructure support for exporters and domestic businesses,
trade are a few examples); improve infrastructure to connect will become crucial to sustain growth.
to world markets; and concentrate on incentives to attract Sustainable growth also will require significant struc-
capital and knowledge (for example, special economic zones tural change, because future growth will have to rely more
to foster agglomeration economies and diversification). and more on productivity increases. However, the country
Despite some success in diversifying the Uzbekistan faces serious structural reform bottlenecks; the Uzbek au-
economy, important goals have not been met and there are sig- thorities’ continue to delay critical reforms that hamper
nificant opportunity costs and risks to the country’s develop- private business incentives and improvements in produc-
ment strategy that question its long-run sustainability. Upon tivity, making long-term growth unsustainable. Wide-
independence in 1991, Uzbekistan inherited one of the low- spread government controls, particularly on prices, and
est standards of living in the Soviet Union; the economy was trade restrictions resulted in resource allocation distor-
reliant on raw materials such as cotton, gold and natural gas, tions, increased transaction costs, and inefficiency. They
while heavily dependent on imports of oil, wheat, meat, and also have costly welfare impacts and encourage informality.
most manufactured goods. Against this background in the While measures have been taken recently to support small
mid-1990s, the government began implementing a long-run and medium enterprises (SMEs), increase utility tariffs to
strategy to transform the economy from heavy dependence on cost recovery levels, and simplifying some business registra-
agriculture and natural resources to a modern industrial econ- tion procedures, the business and governance environment
omy. Initially this strategy was import substitution based, but indicators rank among the lowest in the world.
recently has become more export-oriented and focused on
Is Uzbekistan on Track to Achieve
nurturing selected infant industries (in which Uzbekistan
Its Objectives?
might not have a comparative advantage) organized in state-
controlled industrial associations and state-owned joint-stock So, can Uzbekistan become an upper-middle-income country
companies through open-ended protection. by 2030? Yes, it can. But perhaps a more important question
The global environment for growth in the medium-term is whether this will be easy. The government’s approach to-
has become more challenging. A prolonged period of lower ward achieving its goals is to continue the gradual transition
growth in advanced economies, for example, would mean to a more market-oriented economy, to ensure an equitable
slower growth in markets for Uzbekistan exports. Financial distribution of growth among regions, and to maintain infra-
sector challenges, heightened risk aversion, and large sover- structure and social services. What will be critical for the suc-
eign debt refinancing needs in many advanced economies cess of these strategies is how well they are implemented.
also point to a period of less abundant and costlier capital There are still significant obstacles affecting the operation of
over the coming years. A more challenging and uncertain firms, including cash and foreign exchange controls; excessive
medium-term outlook for global growth means that Uzbeki- government participation in the economy; major regulatory
stan will need to focus more on domestic policies and re- obstacles to trade; and cumbersome licensing and permit
forms that can remove structural impediments to growth frameworks. In addition, Uzbekistan’s trade policies are
and generate enough jobs for the rapidly expanding labor among the most restrictive in the region, and they continue to
force. The challenge will be not just to support rapid growth, be an important impediment to regional trade. At the same
but to do so through systems that also encourage greater time, governance and transparency remain important areas
equality of opportunities, greater competitiveness, and re- where progress is needed. The limited availability of key eco-
spect for the environment. nomic, financial, and social data makes it difficult for those
Weaker external demand and likely lower commodity interested in Uzbekistan to know and understand the main
prices for exports in the short or long term would negatively strengths and opportunities of the economy.
affect economic growth and call for diversification of Uzbek At the same time, there are important distortions in agri-
exports toward higher value-added goods and services. How- culture that hamper productivity growth such as implicit net
ever, securing access to foreign markets for growing manufac- taxation and mandatory cropping patterns in cotton and
turing and food exports would require accession to the WTO, wheat. The total value of the implicit tax on cotton produc-
especially because Uzbekistan’s major importer of manufac- tion through depressed output prices well below world mar-
turing goods—–Russia—has recently joined the WTO. This ket prices tended to significantly exceed the total value of in-
would, however, require changes in government policy, be- put subsidies, thus imposing a net implicit tax on cotton
cause the current practice of supporting enterprises with sub- production estimated at around 30 percent of farmers’ gross
5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK
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cotton revenues in 2003 and 2004, which is much higher the long distance to leading world markets, which favored the
than corporate and personal income taxes. Cotton produc- consolidation of capitals and a few other leading cities (Cou-
tion could be increased at no cost to the budget if input subsi- libaly et al. 2012). The region, and Uzbekistan in particular,
dies and output taxes were reduced by equivalent amounts. needs a clear vision and strong commitment to cooperative
With state procurement prices for cotton and wheat increas- solutions to create a policy environment conducive to connec-
ing since 2005, net implicit taxation has been slightly re- tivity infrastructures (for example, road corridors and broad-
duced. However, the distorted input and output prices that band networks).
lead to waste and large allocation inefficiencies clearly remain If Uzbekistan uses its policy levers to remove critical
a problem constraining productivity growth. Besides distort- structural constraints, it will be successful in achieving its ob-
ed relative prices, mandatory cropping plans also lead to inef- jective of becoming an upper-middle-income country by
ficient land use and choice of crop. Farmers cannot respond to 2030—but that is not to say it will be an easy path.
changes in international prices as they must comply with
state cropping and production plans. In a modern market About the Authors
economy, there should be no room for this type of controls. Eskender Trushin is the Senior Economist for Uzbekistan in the
Uzbekistan also needs to carefully consider how to se- Tashkent World Bank office. Francisco Carneiro is the Lead
cure competitive access to key trade partners. Limited by his- Economist for Central Asia.
tory and geography, the country is now largely isolated from
the world’s most dynamic centers. As an example, in the post- References
Soviet era, countries that were closer to the European Union Coulibaly, S., U. Deichmann, W. R. Dillinger, et al. 2012. Eurasian
market benefited from the increased integration of the region Cities: New Realities along the Silk Road. Washington, DC:
and witnessed the emergence of urban centers closer to West- World Bank.
WEF (World Economic Forum). 2012. The Global Competitiveness
ern Europe that reinforced economic diversification and Report 2011–2012. Geneva.
housed large numbers of consumers and producers. By con- World Bank. 2008. World Development Report 2009: Reshaping
trast, agglomeration dynamics in Eurasia were attenuated by Economic Geography. Washington, DC.
The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty
Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect
those of the World Bank. The notes are available at: www.worldbank.org/economicpremise.
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