Uzbekistan is at an important juncture today, five years since it began an unprecedented economic and social transformation.
Five years ago, it was very difficult to grow a business in Uzbekistan.
A binding constraint for business growth and job creation was the availability of foreign exchange. About half of Uzbekistan’s foreign exchange trade was occurring in informal markets.
The tax system was a burden on the economy. High taxes made it unprofitable for businesses to grow or create new jobs. Hiring workers was exceptionally costly because of high labor taxes. Tax evasion was widespread, and government revenues depended on a small number of large taxpayers.
Heavy-handed regulations were constraining businesses. Complex licensing requirements reduced market competition and limited supply chains. Lengthy border delays increased costs and losses for Uzbekistan’s high-value horticulture exports.
These constraints not only raised costs for businesses, but also increased corruption and inefficiency, which eroded the competitiveness of Uzbekistan’s formal business sector. This enabled a thriving shadow economy to operate.
But that was five years ago. Today, things are much better.
It is now easy to obtain foreign exchange. Although informal markets still exist, bank and bazar rates have rarely diverged, and almost no one uses the informal market anymore.
Uzbekistan’s tax system is fairer and more efficient. Taxes on businesses and workers are lower. Tax compliance is easier.
Following the tax reforms of 2018, about 1.4 million new citizens and businesses registered as taxpayers, as it became easier to pay taxes than to evade them. Government revenue collections have increased, despite sharp reductions in tax rates.
The business regulatory and trading environment is much friendlier today. New business registrations, horticulture exports, tourism, and foreign investments in local businesses have all grown by record numbers.
Thanks largely to these reforms, Uzbekistan maintained positive annual economic growth in 2020, when most countries saw their economies contract.
Reforms have also been adapted to respond to the challenges imposed by COVID-19. Measures to strengthen social protection and reduce poverty have moved faster, spurred by efforts to protect people’s lives and livelihoods. There is a greater emphasis today on improving the health and education systems.
Uzbekistan’s reforms over the last five years have been impressive. But more is needed to unlock the country’s full potential.
To halve poverty and reach upper-middle-income status by 2030, Uzbekistan needs more and better jobs. Prior to 2017, about 600,000 new job seekers were competing for fewer than 200,000 jobs. Although more jobs are being created in recent years, unemployment remains a challenge.
How can Uzbekistan accelerate the creation of jobs to achieve its 2030 development goals? There are four important ways.
Allowing the private sector to grow. Although the business environment has improved, firms still struggle to access land, capital, and reliable inputs like energy. Insufficient competition, infrastructure gaps, and limited integration with global markets also constrain the emergence of a private sector that creates more and better jobs.
Over 2,000 state-owned enterprises (SOEs) still dominate the economy and prevent the private sector from growing further. Faster privatization, especially of smaller SOEs and banks, could help Uzbekistan’s private sector to expand and create more jobs in the economy.
Creating a more enabling state. It is an important time to reshape the state’s role in the economy from producer to enabler. Laws and regulations need to be simpler, fairer, and more transparent. Public investments are still heavily directed to SOEs. Better infrastructure and public services are needed to support promising new sectors of the economy such as horticulture, tourism, and services.
Uzbekistan’s regions need more power to determine and finance their local development priorities. This will help better harness the different comparative economic advantages of regions and allow for prosperity to be more widely shared across the country.
Increasing investments in people. Skills shortages are constraining business investments in significant ways. Although tertiary enrollment and investments in skills and vocational training have increased rapidly, better alignment with the new private sector economy is needed. Investments in health and education services, and the removal of exclusionary policies that create gender inequities and high youth unemployment, will have a strong impact on Uzbekistan’s human capital.
Improving environmental sustainability. Uzbekistan’s economy is one of the world’s most resource intensive. This model is not sustainable as oil and gas reserves deplete. Climate change has made water scarce. Faster decarbonization and greener growth policies will increase the sustainability of Uzbekistan’s growth. Improving sustainability is not only about managing risks or supporting future generations. It can also create new markets and jobs today.
These are not easy reforms to implement. They will require careful implementation and close monitoring to ensure that outcomes, such as job creation, private sector growth, and greater environmental sustainability are being achieved. If managed well, these reforms will support greater job creation. They will accelerate the economic transition while delivering more prosperity for all of Uzbekistan’s citizens.
I look forward to my visit this week, and to debating these issues at the Economic Forum in Tashkent.
*Originally published in Kun.uz and Gazeta.uz on 27 September 2021, via World Bank