Ladies and gentlemen,
Uzbekistan is very dear to my heart – it was one of the first countries I worked on when I joined the World Bank. I am always delighted by the chance to travel to this wonderful and vibrant country, and I am privileged to have the opportunity to once again work on Uzbekistan during this historic time.
Some of you must be wondering why we thought it would be a good idea to bring the private sector together with students for a discussion. Actually, you are among the most important constituents of the deep economic and social transformation that Uzbekistan has embarked on. Thank you for the invitation to speak to you today, and for the opportunity to listen to your views on the future of Uzbekistan.
I thought I would start this discussion with a few of my own thoughts and reflections on this transformation, and the opportunities that it brings for the future.
Uzbekistan is now entering the third year of the reforms, which started in early 2017. As economists, we often fall into the trap of hiding behind technical language – whether it is "the unification of the exchange rate", or "the removal of administrative price controls." In my remarks I will try to avoid that and focus instead on how the ongoing transformation impacts people's lives and the prospects for Uzbekistan to become a prosperous nation.
For people, the economic and social transformation is making a tangible difference in their lives. Some of these changes have created immediate positive effects. For those living in cities, the markets have a wider choice of products and you can see and feel that people are becoming connected to the world.
For farmers, removal of export controls and large increases in the price paid for cotton and wheat have already started to increase farmer incomes.
For businesses, there are fewer rules and regulations – such as restrictive cash surrender rules and licensing requirements - that constrain their ability to thrive and grow.
Some of the very important changes that, over time, will bring opportunities and better services for all are creating stress for many today. For instance, it costs more to buy bread. Electricity and gas prices are increasing. Businesses face an adjustment to a new tax system. The benefits of these changes, for instance reliable electricity 24 hours a day throughout Uzbekistan, will take time to materialize. Also, very importantly, these changes can affect people differently depending on your income, age, and where you live.
Of course, you understand very well why these changes are necessary, because you are among the groups that were held back from achieving your full potential.
We see that in the labor market, where up to 600,000 newly trained young people were entering the job market and many fewer jobs – many of them part-time or seasonal – were created. We see that in the data on migration, with millions of bright, talented, young citizens of Uzbekistan seeking employment overseas. We see that in numerous analyses of businesses and the private sector, where survey after survey shows the significant constraints and costs that firms must overcome to operate in Uzbekistan.
So, for the millions of citizens of Uzbekistan whose potential has yet to be realized, these changes are historic, and there is no going back. We hear this directly from people. The World Bank conducts a monthly survey — called Listening to the Citizens of Uzbekistan — to understand how the transformation is affecting the lives of citizens. 95% of participants in the survey are optimistic about the future of the country and key reforms, like the exchange rate unification, are seen positively by a strong majority of citizens. We see optimism in every engagement that we have across the country. The message that I hear from the leadership of the country is loud and clear – that Uzbekistan’s doors are now permanently open to the world – and the locks have been removed.
What is most wonderful about this intense optimism about the future of Uzbekistan is that it is contagious. Just look at what happened two weeks ago in London, when the Government issued Uzbekistan’s first sovereign bond. Very few economies have managed to achieve what Uzbekistan did. The bonds were oversubscribed eight times. The price of the bonds was significantly lower than any market analysis had expected. This is a vote of confidence in Uzbekistan’s future. Investors expressed trust and confidence that the reforms will continue, and that the country is on the right track.
At home, in the region, and abroad, everyone is watching and rooting for Uzbekistan to succeed, because the world will benefit from a former Silk Road giant reconnecting with its rich trading and entrepreneurial history. Central Asia will be more prosperous and stable from a vibrant and competitive market economy in Uzbekistan that offers pathways to more and better jobs for the millions of its young citizens.
As you can see, I am very optimistic about the opportunities that await you. Some of these opportunities may take time to materialize – we know from the experience of many other countries that economic transitions are not instantaneous and that more often than not there are bumps on the road. For example, many emerging economies that have adopted VAT reforms face a settling in period that can take some time before the system works normally. This is likely to be the case in Uzbekistan too, but what is important is that these issues will subside, and every entrepreneur that we speak to would never go back to the old control and tax system, which was a burden on businesses, and one of the biggest constraints on job creation.
It is also normal for transitions to create higher costs to the economy, which lead to trade and fiscal deficits. On the trade side, these costs are often due to large increases in imports after years of import controls – especially imports of capital equipment to modernize infrastructure and build modern production capacity. These modernizations are important because they link directly with improvements to services. For example, businesses would be more patient with electricity tariff increases if electricity supply was more regular. A recent World Bank report identified the reliability of electricity services as one of the most binding constraints for small and medium businesses.
Similarly, the government may need to increase public investments during a transition. These investments play an important role during a transition in two ways. First, they help buffer some of the negative costs and impact of the reforms on the most poor and vulnerable. We have seen this be the case in Uzbekistan, as the Government established a job guarantee scheme for rural workers and increased both the allowances for low-income families and the number of eligible recipients for assistance following the first wave of reforms in 2017.
Public investment in infrastructure, when done effectively, can be a major enabler of private sector growth. Early investments in connective infrastructure and in improving services such as electricity and gas can accelerate the competitiveness of businesses by reducing costs and increasing efficiency. This competitiveness can be critical in the early years of a transition such as Uzbekistan’s by allowing export-oriented businesses to take advantage of a competitive exchange rate relative to local costs and demonstrate their value in international markets.
Evidence from successful transitions also show the importance of early investments in education and human capital. These investments help equip youth to seize new opportunities and help support existing workers in retraining and reentering the job market.
In other words, a deficit itself isn’t good or bad. What matters more is how the Government is investing its money during the transition. At the same time, deficits should not be persistently large, as this increases risks to the economy, such as high inflation, debt vulnerabilities, and sharp exchange rate adjustments.
In Uzbekistan’s case, it is also critical that public expenditure is used productively, and not to sustain inefficient parts of the old economic model. In addition to creating macroeconomic risks, such expenditure can lead to slower economic transformation by crowding out private investment and diverting resources away from an eager and productive business community that needs finance and capital to grow and thrive.
And I think that the Government’s approach – of increasing public investments for social and infrastructure spending, and for modernizing the economy – is the right one. We are also confident that the Government has a good understanding of the risks involved with this transition, and that good economic management and strong fiscal discipline are high priorities. It is this confidence that underpins the increased financial support from the World Bank. In both 2017 and 2018, we committed 1 billion dollars in new projects.
I came here today to spend some time with you and share my views and reflections on Uzbekistan’s reform journey. As you can see, I am very optimistic about the reforms and the incredible opportunity that it presents to everyone – including young people and women – to participate in the economic future of Uzbekistan.
Even though I have now been to Uzbekistan many times, the imagery and history of this country, and the warmth and kindness of its people, is something that never ceases to amaze me every time I visit.
It is my hope that you feel the same hunger for the future of your country at this momentous time in its history.
Thank you very much, and I look forward to our discussion.
Cyril Muller is Vice-President for Europe and Central at the World Bank.