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The Vital Economic Role of the Private Sector, In Uzbekistan and Globally

Janamitra Devan, Vice President, Financial and Private Sector Development, The World Bank and International Finance Corporation

Tashkent, Uzbekistan

September 18, 2012

Transcript

September 14, 2012

Mr. President, Your Excellencies, distinguished guests, and ladies and gentlemen:

It’s a pleasure to join you here today in this beautiful city, and to add the perspective of the World Bank and the International Finance Corporation (IFC) to this important conference.

Mr. President, thank you for this opportunity to address this distinguished audience, and thank you for your inspiring remarks on the importance of small and medium-sized enterprises (SMEs).

Along with the many policymakers and scholars who will address today’s conference, I will be especially pleased to hear the thoughts of my friend and former colleague Justin Lin. Justin served for five years as the Chief Economist of the World Bank, before returning this summer to his professorship at Peking University. I told him last night that he is already looking younger, since leaving the World Bank. Justin surely ranks among the world’s foremost scholars in the realm of development economics.

The many insightful viewpoints that we’ll hear today will make an excellent contribution to Uzbekistan’s economic policy debate, as we pursue our shared goal: finding the most effective ways to strengthen the country’s economy and promote long-term prosperity.

We appreciate Uzbekistan’s steady growth and development achievements over the past 21 years – in particular, your ability to sustain high growth rates during the recent global financial crisis.

The World Bank Group – the Bank itself, plus our private-sector arm, the IFC – is pleased to be a creative partner with the people of Uzbekistan in promoting economic development. I am honored to represent both the World Bank and the IFC.

In my brief remarks today, I’d like to underscore three key points – and I speak not so much from the perspective of an official of an international organization, but from the perspective of someone who spent 25 years in the private sector before I joined the World Bank and IFC. So I have been through the difficulties that all private-sector people go through.

Open Quotes

Global experience shows that easy access to foreign exchange and cash – as well as to reliable economic data – helps attract foreign investment. Close Quotes

Janamitra Devan
Vice President, Financial and Private Sector Development, The World Bank and International Finance Corporation

First: Micro, small and medium-sized enterprises (MSMEs) are at the heart of every country’s economic ecosystem. They have to be the centrifugal force that keeps the private sector changing. Their capacity for innovation and expansion is the key to building competitiveness – the ability to create high-quality products that rival those of other nations, and that are able to gain a greater market share in global competition. They are indispensable factors in positioning your country’s industries for international competition.

Second: A new paradigm is emerging around competitive industrial ecosystems that build a closer partnership between the public and private sectors, focused on competitiveness. We must nurture that new approach, but we must also handle it carefully.

Third: Our changing approach to promoting competitiveness requires us, as policymakers, to focus on a wide range of policies – not focused solely on financial capital and industrial resources, but also on human capital, behavioral norms, corporate governance, technology and infrastructure. To achieve positive results, we must pursue a holistic approach to private sector development – focused on competitiveness along a spectrum of issues. Private sector development does not depend only on getting one or two things right.

Let me explore, in turn, each of these three key ideas.

First: Let’s consider the pivotal role that MSMEs play in the economy.

In developing economies worldwide, formal SMEs contribute as much as 45 percent of employment and as much as one-third of Gross Domestic Product.

In the case of Uzbekistan: Recent government statistics show that MSMEs account for almost three-fourths of the employed population, and they generate more than half of the country’s GDP.

As a share of GDP, MSMEs grew from producing less than one-third to generating more than one-half from 2000 to 2010.

MSMEs include about 460,000 enterprises, employing an estimated 8.6 million people – having doubled the number of employees within a decade.

MSMEs, both formal and informal, are the unsung heroes of growth. They are the economy’s intermediaries: They link the local economy into larger value chains – providing raw materials, components and specialized services.

MSMEs are well known to be crucial providers of innovation and employment.

Yet, despite MSMEs’ vital role – and despite the significant steps taken by the public sector to stimulate lending to MSMEs – many challenges still remain.

For example, MSMEs often do not receive the financing, support or recognition that they need to flourish.

Worldwide, between 45 percent and 55 percent of formal SMEs in emerging economies do not have access to formal institutional loans or overdrafts.

This financing gap can cause severe damage to the national economy as a whole. Leading economists warn us not to underestimate the depth of that damage, due to the misallocation of capital, caused by credit constraints.

According to one calculation, by Abhijit Banerjee and Esther Duflo of MIT, the productivity loss in medium-size firms in India – due specifically to those constraints – may be large enough to explain the entire productivity gap between India and the United States.

So finding effective ways to support MSMEs is certainly crucial to economic growth.

However, it is important to ensure that credit growth is sustainable, based on an adequate assessment of firms’ creditworthiness and their projects’ economic viability.

The development of adequate financial instruments is also important, to ensure that credit demands are met, not only for large, well-established firms, but also for young, dynamic MSMEs.

Second: Let’s explore the new paradigm for competitive industrial ecosystems and private sector development – an approach that seeks the appropriate balance between private sector initiative and public sector support.

Under the recently issued Presidential Decrees, Uzbekistan has identified the need to support the development of the enterprise sector as a necessary condition for export growth, competitiveness and economic diversification. MSMEs will play an instrumental role in this pursuit.

Over the years, in my efforts in both the public and private sectors, I have seen how industry-based strategies – focused on targeted investments in specific sectors – can lift millions of people out of poverty and into jobs.

Various countries – and the numbers are growing – have used different models, adapting their strategies to fit local economic conditions. But all those that have flourished, have done so by creating industrial ecosystems in which specific sectors can thrive.

Here are a few examples:

South Korea, which had been shattered by war, has become one of the world’s most advanced societies by focusing on the advanced industries of “the knowledge economy,” like information technology and sophisticated electronics.

The city-state of Singapore (the country that I am originally from) has limited natural resources, yet it has built a thriving industrial ecosystem around shipping, petrochemicals and finance.

Malaysia has prospered by targeting investment in heavy industries like electrical equipment.

In more recent years, China has offered another model of development, focusing on manufacturing. Active government support has sought to create the foundation of sustained economic growth and job creation.

The idea of enhanced public-private cooperation is taking hold in developed economies, as well.

Even in the United States – where a free-market mindset traditionally overshadows public sector involvement – targeted public support of private enterprise has been pivotal to innovation and growth.

The industries of Silicon Valley gained critical support from public-sector demand. Even the Internet – which has done so much to transform the global economy – had its origins in heavy funding by military research-and-development programs.

So, make no mistake: Just providing an enabling environment for business, while important, is not enough.

Each country has adapted its own model of development.

Yet an important common factor within all the modern economic success stories has been a targeted approach to investing in specific sectors – and building ecosystems that bring together producers, their supply chain and economic foundations that propel skills and capabilities, technology, industrial infrastructure, finance and a best-in-class investment climate. All of these are critical.

It’s little wonder that, amid today’s global economic downturn, governments are increasingly turning to direct collaboration with the private sector.

For the past couple of years, within the Bank, we’ve been reflecting on, and gradually evolving, our thinking in the area of competitiveness.

Leading our Private Sector Development efforts, I’ve been immersed in these debates – and we have overseen the creation of an entirely new Practice within the Bank: promoting what we call “Competitive Industries.”

Our approach is to help our client countries focus on making well-calculated decisions to promote industry- based sustainable growth.

A key part of this new paradigm is, simply, competitiveness – which requires industries to remain closely attuned to marketplace demand.

Policymakers and industrial leaders must avoid repeating the mistakes that often occurred under more heavy-handed approaches to top-down planning.

Instead, bracing an industry for global competition calls for constant calibration of an industry’s output with the changing demands of the marketplace.

There is no one-size-fits-all set of policies that is universally useful.

Each country will have to find its own balance between the government and the market.

Strong and durable partnerships among the public sector, the private sector and development partners can be a helpful enabler of economic growth.

But responsiveness to the market is essential, requiring enterprises to remain responsive to real-time demand.

Another important pillar of competitiveness that I had mentioned is skills and capabilities: the availability of a workforce that has the skills necessary for the development of competitive industries, especially if you want to move up the value-added chain.

Uzbekistan has a young workforce, which is, in itself, a very important asset. Education reforms have contributed to enhancing their skills. In the future, ensuring the responsiveness of education to marketplace demand will be of paramount importance.

Third: Let’s weigh the requirements that this new paradigm places upon us, as policymakers.

Successful private sector development is arguably, the cornerstone of sustainable poverty alleviation. Only the private sector – attuned to market signals, and spurred by the reality of profit and loss – can generate jobs and incomes that are sustainable for the long term.

At the everyday level of the practical execution of a business model, private-sector development requires more than just broad policy reforms.

The new paradigm of development demands that we combine macro-level policy approaches and micro-level thinking in a programmatic private sector development approach.

Through our experience in a wide range of countries, we have come to learn that every aspect of the industrial ecosystem must be continually reconsidered and, if need be, recalibrated.

Some factors that contribute to strong economic growth are structural; other factors are behavioral.

On the structural side, economically successful countries recognize that the regulatory environment should strike a balance, protecting the public good without overburdening private enterprise.

Investment in an agile and modernized infrastructure targeted to wealth-producing sectors – underpinned by skills training, access to finance for MSMEs, building an appropriate technological capability and a viable investment climate – creates “public goods” that have an enormous payback in long-term productivity.

Access to finance requires a resilient banking system and robust capital markets. Innovation in technology requires a pragmatic patent law.

Export competitiveness requires a well-functioning National Quality Infrastructure system.

Global experience shows that easy access to foreign exchange and cash – as well as to reliable economic data – helps attract foreign investment.

In other words: The ecosystem is a complex one that requires a multi-faceted plan of action. Building a viable private sector requires meticulous planning and execution. No long reports alone will do the trick: It’s all about implementation on the ground. You should demand that international organizations, like ours, help provide practical solutions. We stand ready to help.

On the behavioral side, economically successful countries recognize that transparency is vital in building confidence – and that nothing is so destructive of public and investor confidence as corruption.

Policies that are inclusive and gender-neutral help empower workers – and help evoke the greatest productivity from a country’s human capital.

Inclusive and sustainable conditions, shaped by transparent public-policy-making, can fully liberate the creative energies of the economy.

In Uzbekistan, where significant efforts are already being undertaken, many challenges will need to be addressed.

Some insights about continuing challenges are clarified by the indicators in “Doing Business,” the annual World Bank publication that reviews many of the country-by-country conditions that allow for competitiveness.

“Doing Business” is published by the private sector division of the Bank that I oversee, and we have a constructive and continuing dialogue with your national government on how the data should be interpreted.

We recognize the significant steps that the Government of Uzbekistan has been undertaking in many of these areas.

For example, the recent Presidential Decree indicates the direction in which the business environment should move to achieve international standards.

We hope that they will bear significant fruit in the near future.

Many of these actions were supported by the World Bank and the IFC’s Advisory Services over the past decade.

Reforms are responding to the emphasis, by the Government of Uzbekistan itself, toward actively pursuing economic diversification as a basis for sustained growth. That would support the country’s effort to achieve the status of a high-Middle Income County.

As part of our engagement with Uzbekistan, the World Bank and IFC have been providing Technical Assistance on strengthening the business environment in many areas – among them, Construction Permits, Land Registration, and Secured Lending.

In addition: In the financial sector, the Bank has been providing Technical Assistance to strengthen bank and insurance supervision and regulation.

A range of exciting efforts are under way.

We foresee that opportunities in Uzbekistan are poised to grow – and that the importance of SMEs is destined to become ever more significant.

The World Bank and the IFC are committed to a constructive partnership with Uzbekistan, helping overcome potential obstacles and helping shape a business environment that helps SMEs and the rest of the economy to thrive.

It’s a pleasure to join you here today, and I thank you for this opportunity to contribute to the discussion. I’m looking forward to exploring a range of ideas on this panel, and to our discussions over the long term.

Thank you very much.