Diversifying Uzbekistan

Transcription

1 Country Partnership Strategy: Uzbekistan Diversifying Uzbekistan 28 January 2011 Central and West Asia Department

2 2 1. Introduction Uzbekistan is a natural-resource rich economy situated at the heart of Central Asia. It is the second largest economy in Central Asia after Kazakhstan (GDP of $39 billion in 2010), and the most populous country in the region with 28.6 million people. Uzbekistan is a lower middle income economy on a per capita basis, with a GNI per capita of $1,381 in Its geographical area of 477,400 sq. km is doubly landlocked as it takes traversing two countries to reach a coastline. 2 Uzbekistan is a major exporter of gold and counts natural gas and other non-ferrous metals among its other major exports. It also has a strong agricultural base and is one of the largest world producers and exporters of cotton. Uzbekistan aims to be a socially-oriented free market economy (Karimov, 2009). Since its independence in 1991, Uzbekistan has proceeded more cautiously than other transition economies to build the framework and institutions of a market economy. Gradualism is the term used to define its approach to transition and market reform and is identified with incremental steps towards economic liberalization amidst continuing state controls over banking and large scale industries, import-substitution strategies, and the quest to attain selfsufficiency in energy. The consequently less well-integrated economy of Uzbekistan has been largely shielded from the impact of the global financial contagion of 2008 and The Government of Uzbekistan has, therefore, felt vindicated in its choice of gradualism as a principle for economic reform. Uzbekistan has grown steadily with an annual average growth rate of 4% between 1996 and Subsequently, it experienced a major growth spurt that doubled its average growth rate to 8% between 2004 and Uzbekistan has today become one of the strongest performing economies in Central Asia. The unleashing of high economic growth in Uzbekistan is attributed to the mentioned gradual implementation of policies aimed at economic liberalization, particularly the introduction of the current account convertibility in 2003, agricultural reforms, and a favorable external export environment in recent years underlined by high international commodity prices for hydrocarbons and gold. A growing export base has supported GDP growth. Uzbekistan s exports diversified, and more than doubled from an annual average of $4 billion during to an annual average of $9 billion during Agricultural output, too, has diversified from cotton production to wheat and other foodstuffs; and the private sector has slowly gathered momentum. 2 Kazakhstan and the Aral Sea lie to the north and northwest of Uzbekistan. Kyrgyz Republic lies on the northeast, Tajikistan to the southeast, Turkmenistan to the southwest, and Afghanistan to the south.

3 3 A key question for Uzbekistan is whether the present strong growth of over 8% can be sustained over the medium term to generate jobs, reduce poverty, and improve the quality of life of its citizens. To do so, Uzbekistan faces a number of constraints. President Islam Karimov has identified two key constraints Uzbekistan s geographical location (i.e. doubly landlocked) and its heavy dependence on natural resources (Karimov, 2009). Being landlocked has the disadvantage of facing higher costs of transportation and longer travel time due to the absence or limited accessibility to coastlines. In addition to this is the disadvantage of being dependent on the infrastructure network of its landlocked neighbors. Uzbekistan s heavy reliance on natural resources also exposes it to the problem of the Dutch disease associated with challenges of currency appreciation endangering competitiveness of exports and revenue resource management. This paper argues that Uzbekistan needs constant modernization of its economy through structural transformation and diversification to sustain growth. No economy in recent history has been able industrialize and grow without a transformational process that results in modernization, higher value addition, and stronger sophistication of its products base and exports. Contrary to the previously held notion of specialization, this transformational process requires diversification of products base and exports. Strongly growing economies of today such as the People s Republic of China and India are much more diversified than, for example, countries in Central Asia. Transformation and diversification requires countries to have necessary capabilities to conceptualize and implement critical changes in production and export structures. Does Uzbekistan have these capabilities? Using a product space (see Box 1) methodology, this paper aims to determine how far the economy of Uzbekistan has progressed since independence in 1991 on transforming and diversifying its economy by examining its current productive structure relative to its current capabilities. The paper will also determine what unexploited but realistic opportunities there are for the Uzbek economy to diversify to. To do so, the paper identifies the products which have the highest potential of expanding the economy s ability to accumulate more capabilities and produce more sophisticated products. A main premise of the paper is that processes of structural change do not happen automatically or in response to market signals alone. Structural change has to be induced through specific industrial policies developed and implemented by the state in close collaboration with the private sector. The developed economies of today have followed similar policies to transform themselves and diversify and modernize their production structures. Industrial policy is needed

4 4 because processes of structural transformation involve concerted actions of many independent agents that need to be coordinated and harmonized through specific policy mechanisms (Fernández-Arias, Agosin, and Sabel, 2010). This paper discusses guidelines for developing a modern industrial policy framework that is essential to implement policies geared towards achieving structural transformation and diversification. The following section (Section 2) describes the specific policy intentions and strategies of the Government of Uzbekistan to promote structural transformation and diversification of the economy. Section 3 analyzes the links between the concepts of sustainable growth and structural change. Section 4 introduces the concept of product space methodology. Section 5 uses a products space methodology to examine Uzbekistan s current production structure and capabilities. Section 6 explores Uzbekistan s unexploited export opportunities and identifies products that have the highest potential for upgrading the economy s productive structure based on the results of the product space analysis. Section 7 provides the principles of a modern industrial policy framework. Section 8 identifies certain specific areas for industrial policy interventions in Uzbekistan. Section 9 concludes. 2. Government of Uzbekistan s priorities and strategies for industrialization President Karimov is a big proponent of structural transformation. Writing in 2009, the President clearly acknowledged the urgent need for Uzbekistan to undertake structural change to sustain growth in the backdrop of the global financial crises (Karimov, 2009 and 2010). The main highlights of the measures he suggested are: 1. Modernize the economy through structural transformation, upgrading, and diversification; 2. Develop a system of modern infrastructure; 3. Generate productive employment; 4. Support exports; 5. Raise competitiveness of the private sector; 6. Modernize the energy sector; 7. Stimulate demand for the domestic market; 8. Support agricultural development and increase living standards in the countryside; and 9. Accelerate the development of services. Uzbekistan s Welfare Improvement Strategy (WIS) for , which is the main articulation of the Government s development vision and strategy for this period, is in full

5 5 conformity with the strategic directions laid out by the President (Republic of Uzbekistan, 2007). The WIS seeks to improve living standards of Uzbek citizens through forming a modern and diversified economy able to compete in world markets. The WIS focuses on maintaining high rates of economic growth as a key development objective in order to increase the country s international competitiveness, economic diversification, and transition into a technologically developed producer of a wide range of export commodities and services. The need for structural transformation and diversification is prominent among the eight factors identified by the WIS as having the potential to contribute the most to economic growth: 1. Active restructuring of the economy; 2. Gradual re-orientation of export policies from the export of commodities to exporting products with high value added; 3. Continued economic liberalization; 4. Development of the financial sector; 5. Increasing investment in human capital to form a knowledge-based economy ; 6. Ensuring an information rich society; 7. Establishment of innovation institutions; and 8. Comprehensive area-based development. The WIS identifies specific sectors and industries for the Government to prioritize that would enhance the economy s competitiveness by moving away from raw materials towards manufacturing products of higher value-added. These include the following: 1. Basic industrial sectors such as fuel and energy industries (electricity, oil and gas), chemical industries (petroleum, biochemistry, and pharmaceutical), and ferrous and non-ferrous metallurgical industries; 2. Labor intensive industries (textiles, leather and footwear, and construction); and 3. Machinery, transport, and electrical equipment industries (automobiles, agricultural machine-building, cable, and conductors). The investment policy in the WIS directly supports structural transformation through stressing the continued expansion of the industrial sector to higher-value-added production, expansion of the services sector, promotion of dynamic development of small businesses, and increasing competitiveness through the (i) modernization of existing enterprises and industries, (ii) creation of new high-tech industries, and (iii) introduction of mechanisms for innovation, along with the creation of a favorable investment climate for investors. The WIS also emphasizes the economy s integration to the global economy by creating the necessary conditions for achieving

6 6 high export growth rates and increasing the proportion of high-value-added goods and services in the overall export structure. In the agriculture sector, the focus of WIS is on growing crops with higher yields while gradually transitioning away from growing cotton, and on promoting the use of agro-technologies that will enhance yields of crops and livestock farming productivity. Despite clear policy intentions, the implementation of the above strategies and policies in Uzbekistan has so far, however, resulted only in modest economic transformation. The industrial output share in GDP has certainly increased since 2001 but the industrial sector s share in the employment structure of the economy has remained the same since the country s independence (around 13%). The share of services in GDP increased from 43.3% in 2001 to 46.4% in The output share of the agricultural sector has declined from 34% in 2001 to 19.1% in Sustainability of Economic Growth and Structural Change The literature on transformation shows that sustained economic growth is closely related to structural change. Lucas (1993) characterized economic growth as a process that generates activities of higher productivity and increasing returns to scale rather than one in which an economy keeps reproducing itself at a larger scale: A growth miracle sustained for a period of decades clearly must thus involve the continual introduction of new goods, not merely continued learning on a fixed set of goods. In the same vein, Kuznets (1973), defined economic growth as the growing capacity of a country to produce increasingly diverse goods based on an advancing technology and the institutional and ideological adjustments that such capability requires. Both characterizations of economic growth necessitate the transformation of the economy s productive structure towards more diverse, new, and higher-valued goods and require the ability to acquire and accumulate more complex capabilities, together with the existence of necessary institutions to achieve such economic transformation. A closely related concept is structural change which refers to the transformation of the economy by transferring resources to higher productivity activities through (i) diversifying production, (ii) upgrading exports and production, and (iii) increasing labor productivity. Structural change involves changing factor endowments as a country accumulates physical, human, and institutional capital (Hidalgo, et al, 2007). With structural change, firms learn to produce and export more sophisticated and technologically-advanced range of products, and output and employment structures move towards higher-valued sectors (for example, from agriculture to

7 7 industrial or highly productive services sectors). Simply put, structural change involves changes to what a country produces, shifting away from low-productivity, low-wage activities to highproductivity, high-wage activities. Structural transformation, that is, moving towards new and high-valued activities (upgrading) and diversifying, however, is difficult and by no means inevitable; it has to be policy-induced (Fernández-Arias, Agosin, and Sabel, 2010). If markets were left alone to catalyze structural transformation, there would be underinvestment in new higher value-adding activities and sectors due to the uncertainties inherent in venturing into such activities. Market failures such as knowledge spillovers, coordination problems, and information externalities would also impede transformational processes. Also, the new activities and sectors will require complementary public inputs such as property rights, institutions, and infrastructures that the private sector will not provide by itself. 4. The Concept of the Product Space Recent empirical studies on structural transformation examine how countries transform their productive structure by diversifying and upgrading their exports using the product space (See Box 1) methodology. These studies show that the capability to diversify and upgrade a country s productive structure is dependent on the distance of the existing capabilities and complementary inputs of a country from those needed to produce products of higher values. A country s capability for structural change can be revealed by the position of its exports in the product space. The export basket s position in the product space signals its capacity to expand to more sophisticated products, laying the basis for future growth. A country that exports products that are mostly in the periphery will find it difficult to jump from one product to another since the redeployment of production to other nearby products is more challenging as no other set of products require similar capabilities. Developing countries generally export products located at the periphery of the product space. In order to get rich, developing countries need to change what they produce and export, that is, they need to find a way to shift production from the periphery to the core, which requires development of capabilities that can be easily redeployed. But, as stressed previously, the market alone will not induce this kind of transformation.

8 8 Box 1. The Product Space The product space (Figure 1) is an application of the network theory that yields graphical representation of all products exported in the world. It shows the proximity of all products to each other. Proximity in this context does not refer to a physical distance; rather, it measures the likelihood that a country exports a product given that it exports another. It is calculated as the minimum of the pair wise conditional probabilities of a country c exporting a good given that it exports another. Algebraically, this can be written as: i, j min P RCAx RCA i x, P RCA j x RCA, j xi where RCA stands for revealed comparative advantage of value no less than 1 when the country s world market share in that good is greater than its world market share in all exports, or put another way, when the good s share of the country s export basket is greater than the good s share in world exports. The different circles in Figure 1 represent products (a total of 779 in this configuration based on the 4- digit level of disaggregation of the Standard International Trade Classification (SITC) revision 2 in the UN COMTRADE data). The size of the circles is the export share of the product in total world trade. Colors represent the 10 product classifications introduced by Leamer (1984), which is based on relative factor intensities (that is, the relative amount of labor, land, capital, and skills required to produce a product). The lines linking the circles represent the proximity between them. A red line indicates high probability of exporting both products with comparative advantage, while a blue line indicates low probability of exporting the products jointly with comparative advantage. The product space is highly heterogeneous. Some products are close-by to others (because they require similar capabilities) those in the core (the dense lump in the middle)--which consist of machinery, chemicals, and metals. Other products are in sparse areas of the product space those in the periphery-- which consist of petroleum, raw materials, tropical agriculture, animal products, cereals, labor intensive goods, and capital intensive goods (excluding metal products). Products in the periphery tend to be produced together with fewer other commodities compared to those in the dense area (the core) because the capabilities required for the former set of products are too product-specific and cannot be redeployed to other productive pursuits. Source: Hidalgo, C.A., B. Klinger, A.-L. Barabási, and R. Hausmann (2007) Public policies that lead to development of such capabilities will, therefore, be needed and should be encouraged. These policies could be either horizontal (policies that provide indiscriminate benefits to all industry sectors or vertical (policy frameworks that target specific industry sectors). Examples of horizontal policies include provision of many types of public goods such as basic infrastructure, technical and vocational education, improvements in the overall business climate, specific exchange rate policies to boost all exports, or even high uniform tariffs over a specified period of time. Examples of vertical policy measures, on the other hand, include rural roads or cold storage logistics to benefit marketing of agriculture production, sector specific import quotas, specific production subsidies, and the like. Such policy measures, however, require an experimental approach and some degree of creativity, such that development becomes a process of self-discovery (Hausmann and Rodrik, 2003).

9 9 Figure 1. A Visual Representation of the Product Space Source: Hidalgo et al. (2007) 5. Product Space Analysis: Uzbekistan s Current Export Structure Table 1 shows the changes in the export structure of Uzbekistan from 1995 to There are four main observations on these changes. First, although the share of raw cotton in total exports has fallen significantly (from 65% of exports in 1995 to only 19% or exports in 2007), it remains the largest individual contributor to the country s exports. Second, the sophistication level of the country, as measured by its EXPY the weighted average of the income level of the products exported has increased during the 12-year period (from 5,868 USD to 9,745 USD) due to the entry of more sophisticated exports such as passenger motor vehicles and chemical products like polyethylene into Uzbekistan s exports basket. 3 Third, Uzbekistan s top four exports in The EXPY is the productivity level associated with a country s export basket. It is calculated by first measuring the average income level, or price, associated with each export good. This is PRODY, the income per capita of the exporters of a good weighted by the revealed comparative advantage of each country that exports the good:

10 10 comprised more than half of its exports, which is indicative of very high export concentration and the lack of diversification in the country s export basket. Finally, Uzbekistan in 2007 continued to export mainly natural-resource-based products. Table 1. Share of Uzbekistan s top 20 exports, selected years Commodity Sophistication Raw cotton, excluding linters, not carded or combed 1, Petroleum gases, not elsewhere specified, in gaseous state 11,087 < Passenger motor vehicles (excluding buses) 21,049 < Special transactions, commodity not classified according to class 15,791 < Copper and copper alloys, refined or not, unwrought 5, Radioactive chemical elements, isotopes etc 3, Cotton yarn 5, Gold, non-monetary (excluding gold ores and concentrates) 4, Zinc and zinc alloys, unwrought 12, Fruit, fresh or dried, nes 6, Cement 5, Polyethylene 20,811 < Grapes, fresh or dried 10,920 < Bars, rods (not wire rod), from iron or steel; hollow mining drill 10, Mineral or chemical fertilizers, nitrogenous 16, Other fresh or chilled vegetables 6,086 < Tomatoes, fresh or chilled 7,850 < Insulated electric wire, cable, bars, etc 8,942 < Ores and concentrates of precious metals, waste, scrap 5, Under-garments, knitted/crocheted; of cotton, not elastic nor rubberized 6,301 <0.1 < Subtotal Sophistication at the country level (EXPY) 5,868 5,911 7,837 9,745 Sophistication at the country level (non-oil EXPY) 5,832 5,840 7,831 9,739 Source: UN COMTRADE, staff calculations. Figure 2 shows Uzbekistan s continued dependence on natural resource exports more clearly. Agriculture and non-agriculture natural resource exports together comprised more than half of Uzbekistan s total exports in 2007, even though there is a declining trend in the share of such exports over the last decade and a half. This high dependence on natural resources makes xvalci xval where xval ci ci is the value of country c s export of good i and GDPpc c i PRODYi GDPpcc c xval ci xval c ci i is country c s per capita GDP (Hausmann, Hwang, and Rodrik, 2007). This product-level measure of sophistication is used to measure the sophistication of a country s export basket as a whole. EXPY is simply the PRODY of each good i that country c exports, weighted by that good s share in the country s export basket. It represents the income level associated with a country s export package, or alternatively, the income per capita of a country s competitors (Hausmann, Hwang, and Rodrik, 2007). xvalci EXPY c PRODYi i xvalci i

11 11 Uzbekistan vulnerable to movements of international commodity prices and to problems attributed to the Dutch Disease mentioned earlier. Figure 2. Composition of Uzbekistan s Exports Export Share (%) Agricultural Manufactured Non-agricultural Source: UN COMTRADE, staff calculations. Figure 3 illustrates that the sophistication of Uzbekistan s export basket, measured by EXPY, has indeed increased significantly. But it remains very low compared to the sophistication levels achieved by other developing Asian countries, like Malaysia and PRC. Moreover, Uzbekistan s current sophistication level is below than what is expected of its income level (Figure 4).

12 12 Figure 3. Export Sophistication (EXPY) of Uzbekistan and Selected Asian Countries Export Sophistication (EXPY): all exports China Malaysia Kazakhstan Kyrgyz Rep. Uzbekistan Source: UN Commodity Trade Data; Feenstra(2005) Source: UN COMTRADE, staff calculations Figure 4. Export Sophistication of Countries with GDP per capita of less than 10,000 USD Export Sophistication (EXPY), (in logs) LBR BDI IRL JPN FIN DEU SWE CHE CZE DNK HUN FRA AUT BEL DZA MEX ITACAN NLD SVK SVN GBRUSA SGP KOR PHL MYS ESP CHN THABLR POL OMN PRT NZL ISR KWT NOR NGA EGY CRI HRV AUS AGO BRA GRC BGR IRN LVA LBY LTU ROM RUS SAU HKGARE IDN UKR VEN YEM AZE ZAF URY TUR IND COG JOR BIHCOL LBN ARG SDN SYR KAZ PAN SLV VNM GEO TKM DOM TUN MKD MDA CHL ARM ECU SLE MOZ NPL SEN MAR ALB CMR BOL TCD GTM PER KENMRT KGZ PAK JAM BGD GIN HTI TJK UZB LKA NIC HND PRY TGO NER MDG ZMB KHM PNG UGA LAO TZA GHACIV MNG RWA CAF BEN ETH MLI MWI BFA GDP per capita, (in logs) Selected ADB member-countries Uzbekistan Note: Countries with population less than 2 million were excluded Source: UN COMTRADE, staff calculations

13 13 The number of products that Uzbekistan exports with revealed comparative advantage, that is, its level of diversification, is also very low, especially for sophisticated products located in the core metals, machineries, and chemicals (Figure 5). And though the country has been able to expand to relatively more sophisticated products such as passenger motor vehicles, these products are still only exported to limited destinations (mostly the Russia Federation). Thus, apart from the need to expand its product lines to high-value products, Uzbekistan also needs to expand its export markets for industrial products. Figure 5. Diversification of Uzbekistan s Exports 400 Diversification & GDP per capita Diversification-Core & GDP per capita 400 Diversification, Average DEU ITA FRA USA ESP BEL POL CZE CHN AUT IND GBR TUR NLD SVN IDN BGR DNK ZAF HRV PRT GRC JPN SWECHE CAN THA BRA ROMLTU SVK UKR LVA HUN HKG EGY ARG FIN LBN VNM BLR KOR ISR MEX NZL BIH TUN COL AUS KEN PAK GTM JORMKD PAN LKA MAR PERURY NPL TZA MDAALB DOM CHL SEN KGZ SYR SLV RUS MYS SGP PHL HND CRI NOR TGO MDG UGA NIC ETH GEO KAZ IRL BOL BGD GHA CIV UZB ARM PRY ECU BFA IRN ARE NER SLE MWI MOZ ZMB LAO MNG KHM HTI BEN JAMVEN MLI TJK SAU PNG CMR YEM AZE BDI RWA GIN SDN COG TKM LBR CAF NGA OMN MRT DZA KWT TCD LBY AGO Diversification, Average DEU USA ITAFRA JPN GBR AUT CZE ESP SWE CHE BEL SVN DNK NLD CHN POL FIN IND BRAMEX SVK KOR UKR HUN ISR THA BGR ROM HRV SGP ZAF TUR PRTGRC HKG CAN IDN BLR JOR BIH LBN ARG LVA LTU PAN RUS MYS EGY COL NZL IRL NOR KEN SEN PHLTUN MDA GTM MKD CRI SLE TGO NPL KGZALB AUS BDI BFA CIV BGD BEN CAF TCD CMR AGO BOL SLV DOM ETH CHL GIN HTI GHA HND COG ECU JAM LBR NER UGA GEO URY MWI MOZ MDG MLI MAR RWA DZA IRN MRT NGA PNG NIC PRYPER VEN SAU TZA SYR ARE ZMB ARM KAZ SDN YEM AZE KHM TJK LAO VNM UZB PAK MNG LKA TKM LBY OMN KWT GDP per capita, Average GDP per capita, Average Selected ADB members Uzbekistan Selected ADB members Uzbekistan Note: Countries with population less than 2 million were excluded Source: UN COMTRADE, staff calculations In its product space, Uzbekistan in 1992 specialized in commodities located mostly in the periphery (Figure 6a), mostly cotton, gold, metal and ores such as copper and zinc, petroleum, and some chemicals. By 2007, Uzbekistan s exports in the product space generally remained peripheral though it had begun exporting more sophisticated products such as road vehicles, as indicated by the large black square in the core (Figure 6b).

14 14 Figure 6a. Uzbekistan s Product Space 1992 Figure 6b. Uzbekistan s Product Space 2007 Source: UN COMTRADE, staff calculations

15 15 Given its present peripheral position in the product space, when its exports are evaluated in terms of their product sophistication (PRODY see footnote 3) and linkages with other products (PATH), Uzbekistan is in a low-product trap (Figure 7). This means that the products that Uzbekistan is exporting with revealed comparative advantage have low sophistication and low to average linkages to other products. Continuing to export such products with low- to mid- paths is indicative of the difficulty Uzbekistan faces to diversify its economy. Figure 7. Uzbekistan s Position in the PRODY-PATH axis Note: Figures on the bars refer to the number of products exported with revealed comparative advantage. Source: UN COMTRADE, staff calculations 6. Potential Export Opportunities In view of the above analysis, what opportunities does Uzbekistan have in diversifying towards more sophisticated and value-adding products? To determine such unexploited opportunities that a country could make use of through further structural changes, an open forest index 4 is estimated, which is a measure of the expected value of goods which a country could potentially 4 Open forest - is technically defined as the sum of the PRODY of each product in which the country currently has no comparative advantage, weighted by the proximity of this product to the current export basket of the country. Hausmann and Klinger (2006) showed that open forest is highly significant in determining the future growth of export sophistication at the country level.

16 16 export. The higher the open forest of a country, the more unexploited opportunities the country has for structural change. A low open forest, on the other hand, implies lower opportunities for diversification. For Uzbekistan, given its current export basket and sets of capabilities, the open forest index is relatively low at $622,125 (PPP) compared to, for example, India s, whose open forest of $2,363,726 (PPP) is much higher than Uzbekistan even though it has a comparable per capita income level. The level of open forest of a country also indicates how flexible it is to adapt to external shocks since it reflects the opportunities available to move to the next best export basket in case the current export basket remains no longer feasible for any reason. Uzbekistan s low open forest implies that it has limited flexibility in moving to another export basket in the face of productivity shocks or other external shocks (such as exhaustion of natural resource, crisis in its trading partners, emergence of a cheaper supplier of current exports etc.). In conclusion, Uzbekistan s low open forest implies that it needs to identify higher value-added commodities for its exports, given its current capabilities, and shift production over time to these products in order to increase its opportunities for further diversification. But how does one determine which products would have the largest contribution to increasing the sophistication of the country s export basket and expanding the capacity of the country for further structural change? A useful indicator to determine this is the strategic value of an export. Strategic value measures the expected contribution of a product (presently located in the open forest) in increasing the sophistication of a country s export basket and expanding capacity for structural change, under the assumption that the country develops a comparative advantage in this product. Successful acquisition of comparative advantage in exporting such an unexploited product has spill-over effects into other unexploited products. This spill-over effect varies across different unexploited products since each product requires different sets of capabilities (Usui and Abdon, 2010). Some products can provide capabilities that can be applied to a wide range of other products, while others have more limited spill-over effects. Products with high strategic values, therefore, signify that acquiring comparative advantage in producing them is accompanied by the development of capabilities that can be used to produce other products, opening more opportunities for the economy outside its current export basket. Uzbekistan s unexploited exports, categorized by their distance from the economy s current export basket (or current capabilities) in terms of being nearby, middle, and far-away, are

17 17 indicated in Figure 8 (see Appendix A for a list of 20 top products for each of the three categories). Nearby products are production possibilities that are still within the range of a country s capabilities. The further the distance of the product from the current export basket (the middle and far away products), the more effort required (further accumulation of capabilities) to ensure that such products can be produced to scale with comparative advantage. All such products have sophistication level (PRODY) higher than the country s current sophistication level (EXPY). Figure 8. Uzbekistan s Unexploited Products by Distance from the Current Export Basket in the Product Space Source: UN COMTRADE, staff calculations In Figure 8, the nearby products are indicated by black squares and appear to be mostly peripheral. Some products in this group, however, are relatively sophisticated (the products with highest sophistication levels are non-ferrous metallurgy such as aluminum and aluminum alloys and metallic oxides of zinc, iron, lead, chromium and electric equipments such as wire, cables,

18 18 cordage, ropes, plaited bans, and slings). Focusing on such nearby products would modestly increase export sophistication but would still not have that much impact in the acquisition of differentiated capabilities to sustain economic growth. The middle products (green squares), on the other hand, are nearer to the core and would have a greater impact in acquiring such capabilities. Examples of middle products include organic chemicals, medicaments, central heating equipment, motor vehicles, paper products, and varnishes. The far away products (pink squares) are those lumped at the core that would have the greatest impact on modernizing Uzbekistan s exports. Examples include chemical products, machinery and plants, pharmaceutical goods, plastic articles, and centrifugal pumps. Noticeably, the middle and far away unexploited products are characterized by higher sophistication levels and higher strategic values. These products would thus have the largest impact on improving the sophistication of Uzbekistan s export basket and would contribute more to the accumulation of necessary capabilities than the nearby products. But being further in distance, producing these products at a sufficiently large commercial scale is far more challenging than producing nearby products, requiring capabilities that the economy might not yet have. These more distant and more sophisticated products are considered strategic bets for investors that would open long-term opportunities for the country. As previously repeated, the production of strategic bets will not happen on its own and will require appropriate state interventions to help the private sector diversify into these products. In Uzbekistan s case, the sophistication and strategic values of its unexploited products increase the farther they are from the current export basket. This implies that the more sophisticated a product is the lower is the opportunity for its production without focused government interventions. If strategic bets are to be promoted, policy makers need to first identify which products to target. Using the product space methodology, some such unexploited products that could be targeted have been identified in this study. This analysis could provide a starting point for the public and the private sectors to get together to deliberate on policy and investment measures needed to improve the sophistication and competitiveness of export products in the economy. 7. Modern Industrial Policy Framework Since structural change will not happen without policy measures sponsored by the state, a discussion on the precise nature of policy measures needed is important to catalyze this process. There is obviously no clear-cut formula but it is clear that structural change will involve

19 19 significant collaboration between the public and the private sectors for policy makers to determine real obstacles faced by entrepreneurs in the way of successfully producing and exporting higher value-adding sophisticated products. Agreement will be need to be reached on the required specific measures from the public sector as well as the private sector for overcoming these obstacles. As mentioned already, policy measures could be either horizontal, which are of uniform benefit for all economic sectors and sub-sectors, or vertical, which target specific economic sectors. Rodrik (2004) provides a broad conceptualization of a modern industrial policy framework to promote structural transformation. Three elements are identified under his framework as being necessary for successful industrialization and modernization of the economy. First, is the presence of high-level political support, which, in this case would refer to the willingness and political leadership of the government to diversify and undertake structural change. Uzbekistan appears to have this support. Second, is the existence of coordination and deliberation councils to promote public-private dialogue. And third, is the presence of mechanisms that promote transparency of operations of these councils and the accountability of public resources used for new activities. In addition, Rodrik recommends ten broad design principles for industrial policy: 1. Incentives should be provided only to new activities; 2. There should be clear benchmarks or criteria for success and failure; 3. There must be a built-in sunset clause; 4. Public support must target activities, not sectors; 5. Subsidized activities should have clear potential for spillovers and demonstration effects; 6. Implementation should be handled by agencies with demonstrated competence; 7. Monitoring should be done by a principal stakeholder who has political authority at the highest level; 8. Channels of communication with the private sector should be maintained; 9. Mistakes that result in picking the losers will occur; and 10. Promotion activities need to have the capacity to renew themselves to ensure an ongoing cycle of discovery. 8. Some Horizontal Elements of an Industrial Policy Framework of Uzbekistan The translation of the above broad principles of an industrial policy framework into industryspecific measures for Uzbekistan should be identified through close public and private sector

20 20 collaboration in areas where the country agrees to place its strategic bets. However, it is possible to already identify some horizontal elements of such a framework, particularly public inputs required to modernize the industrial sector of the country as a whole. Two things stand out in this regard: (i) the need to improve Uzbekistan s enabling business environment; and (ii) the requirement to strengthen and upgrade the country s basic infrastructure. The results of the Doing Business (DB) Survey (2011) provide a reminder of the areas in which the business environment of Uzbekistan needs improvement. On an overall, ease of doing business basis, Uzbekistan appears to have slipped from its 145 th rank in DB 2009 to 150 th rank in DB 2011 in a list of 183 countries (Table 2). Particular areas within the business environment requiring improvement in which Uzbekistan ranks relatively much lower than other countries include: the time and effort needed to obtain construction permits, register property, obtain credit, pay taxes, and trade across borders. Figure 9 confirms that the costs of trading across borders, particularly the cost to import, are generally much higher for Uzbekistan than other countries of the region. This analysis suggests that there is substantial potential to cut costs and increase competitiveness of Uzbekistan s exports. Strengthening the business environment in the country in the above identified respects will have a positive impact on the competitiveness of all sectors and areas of the economy and, therefore, needs to be a crucial part of the industrial policy of the country. Table 2. Uzbekistan Performance on the Doing Business Survey, 2009 and 2011 DB 2011 DB 2009 (out of 183) a/ (out of 183) b/ Ease of Doing Business (Overall) c/ Starting a Business Dealing with Construction Permits Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Closing a Business Notes: a/ Based on reforms between June 2007-June 2008; b/ Based on reforms between June 2009-May2010; c/ DB 2009 overall ranking is based on 10 criteria while as for DB 2011, is based on the 9 criteria in the table. Source: World Bank and International Finance Corporation. Accessed on October and November, 2010.

21 21 Figure 9. The Cost of Trading of Selected Asian Countries, 2010 Source: WB and IFC. Accessed on November 19, Uzbekistan is in line with other countries in the region in terms of its ranking on a composite logistics performance index that measures performance of the quality of trade and transport infrastructure, the competence and quality of logistical services, the efficiency of customs procedures, and the quality and timeliness of shipping services (Figure 10). However, by the benchmarks of developed countries and the People s Republic of China evident in the figure, there remains considerable potential for improvement on infrastructure and logistical services in Uzbekistan and other regional countries. Once again, an active industrial policy in Uzbekistan that is designed to improve the competitiveness of the economy would need to address and improve these critical areas for strengthening the business environment in the country. Figure 10: Logistics Performance Index of Selected Countries, 2010 Source: World Bank. Accessed on November, 2010.

22 22 9. Conclusion This paper concludes that structural change and transformation is critical to sustain growth in Uzbekistan. Structural change requires acquiring sets of capabilities to produce and export more sophisticated and diversified products. The possibility of acquiring such capabilities depends on the current positioning of Uzbekistan s exports in the products space. These capabilities are not easily acquired through market forces alone and require active collaboration between the public and the private sectors through industrial policy mechanisms. Industrial policy has both horizontal and vertical dimensions. In terms of horizontal dimensions, the role of the state in Uzbekistan is critical to promote policies and investments that improve the business environment in the country and strengthen infrastructure and trade logistics. In terms of vertical dimensions, the paper provides indicative lists of more sophisticated products on which the public and private sectors can deliberate to prioritize and develop activity-specific capabilities. The purpose of industrial policy here is to not simply pick winners, but to ensure that the choice of developing specific capabilities is as informed as possible given the costs and constraints and the trade-offs involved. References: Asian Development Bank Asian Development Outlook. Manila. Felipe, J. and U. Kumar Impact of Geography and Natural Resource Abundance on Growth in Central Asia. Working Paper No Levy Institute of Bard College, New York. Hausmann, R. and B. Klinger The Structure of the Product Space and the Evolution of Comparative Advantage. Harvard Center for International Development Working Paper # Structural Transformation and Patterns of Comparative Advantage in the Product Space. Harvard Center for International Development Working Paper # Policies for Achieving Structural Transformation in the Caribbean. Inter- American Development Bank Discussion Paper #2. Hausmann, R. and D. Rodrik Economic Development as Self-Discovery. Journal of Development Economics. 72(2):

23 23 Hausmann, R, F. Rodríguez, and R. Wagner Growth Collapses. Harvard Center for International Development Working Paper No Hausmann, R., J. Hwang, and D. Rodrik What You Export Matters. Journal of Economic Growth. 12 (1): Hidalgo, C.A., B. Klinger, A.-L. Barabási, and R. Hausmann The Product Space Conditions the Development of Nations. Science. 317 (July 27): Karimov, I The Global Financial-economic Crisis, Ways and Measures to overcome it in the Conditions of Uzbekistan. Tashkent Welcoming Address. In the International Scientific-Practical Conference: The Efficiency of the Anti-crisis Programs and Priorities of the Post-Crisis Development (in the case of Uzbekistan). April 12, Tashkent. Accessed at kent.htm Kuznets, Simon, "Modern Economic Growth: Findings and Reflections." American Economic Review. 63(3): Leamer, E Sources of Comparative Advantage: Theory and Evidence. MIT Press: Cambridge, MA. Lucas, R Making a Miracle. Econometrica. 61(2): Fernández-Arias, Eduardo, Manuel Agosin, and Charles Sabel Phantom or Phoenix? Industrial Policies in Latin America Today. In The Age of Productivity: Transforming Economies from the Bottom Up, ed. Pagés, Carmen, pp Inter-American Development Bank (IDB) and Palgrave Macmillan: New York. Republic of Uzbekistan Welfare Improvement Strategy Paper of Uzbekistan: Full Strategy Paper for Tashkent. Rodrik, D Industrial Policy for the 21st Century. Center for Economic Policy Research (CPER). CEPR Discussion Paper No Rodrik, D One Economics, Many Recipes: Globalization, Institutions, and Economic Growth. Princeton University Press, Princeton, NJ.

24 24 Usui, N. and A. Abdon Structural transformation in the Kyrgyz Republic: engineering future paths of capability accumulation. ADB Working Paper Series No World Bank and International Finance Corporation Doing Business Measuring Business Regulations. Accessed on October-November, Doing Business 2011: Making a Difference for Entrepreneurs. Washington, DC: World Bank. World Bank Logistics Performance Index. Accessed on November 19-22, 2011.

25 25 Appendix A. Unexploited exports of Uzbekistan grouped by distance to the current export basket and arranged according to their strategic values "Nearby" Commodities PRODY Strategic Value Export Value ('000 USD) Structures and parts of, of iron, steel; plates, rods, and the like 15,745 13, Aluminum and aluminum alloys, worked 20,778 13,397 1,463 Wire, cables, cordage, ropes, plaited bans, sling and the like 18,403 11,676 2,300 Public service type passenger motor vehicles 10,795 11,613 3,185 Edible products and preparations, nes 13,446 11, Chairs and other seats; and parts thereof, nes 12,666 11, Metallic oxides of zinc, iron, lead, chromium etc 17,124 11, Other furniture and parts thereof, nes 13,575 10, Builders` carpentry and joinery (including prefabricated) 15,311 10,266 1,485 Clay and other refractory minerals, nes 11,362 10, Chemical elements 13,756 9,924 4,401 Potatoes, fresh or chilled, excluding sweet potatoes 14,352 9, Inorganic bases and metallic oxides, hydroxides and peroxides 14,736 9,221 2,730 Fruit, temporarily preserved 9,881 9, Other wheat and meslin, unmilled 11,469 9,047 1,793 Seeds, fruits and spores, nes, for planting 16,139 8, Works of art, collectors' pieces and antiques 16,209 8,495 1,597 Petroleum bitumen, petroleum coke and bituminous mixtures, nes 12,496 8,414 3,881 Building and monumental stone, worked, and articles thereof 12,169 8,264 1,243 Fruit prepared or preserved, nes 10,338 7, Middle" Commodities PRODY Strategic Value Export Value ('000 USD) Varnishes and lacquers; distempers etc 18,793 15, Miscellaneous articles of base metal 17,637 15, Central heating equipment, not electrically heated, parts, nes 19,293 15, Iron, steel, aluminium reservoirs, tanks, etc, capacity 300 lt plus 12,457 15, Manufactures of mineral materials, nes (other than ceramic) 13,719 14,571 1,793 Printed matter, nes 17,022 14,382 2,636 Coated or impregnated textile fabrics and products, nes 19,534 14, Plastic packing containers, lids, stoppers and other closures 13,544 14, Safety glass consisting of toughened or laminated glass, cut or not 19,903 14, Medicaments (including veterinary medicaments) 23,588 14, Piston engines parts, nes, falling in headings: 7132, 7133 and ,650 13,867 2,260 Trailers and transports containers 11,351 13,745 1,691 Polyvinyl chloride 16,188 13, Electric motors, generators (not direct current); generating sets 15,071 13, Special purpose motor lorries and vans 13,260 13, Refractory bricks and other refractory construction materials 18,306 12, Organic chemicals, nes 24,709 12, Motor vehicles for the transport of goods or materials 16,728 12,628 2,168 Paper and paperboard, in rolls or sheets, nes 19,322 12, Improved wood and reconstituted wood 17,096 12, "Far-away" Commodities PRODY Strategic Value Export Value ('000 USD) Miscellaneous articles of plastic 18,059 16,000 1,664 Cocks, valves and similar appliances, for pipes boiler shells, etc 21,910 15, Engines and motors, nes (wind, hot air engines, water wheel, etc) 21,198 15, Lifting, handling, loading machinery, telphers and conveyors 20,702 15,299 3,757 Other parts and accessories, for vehicles of headings 722, ,358 15,187 11,780 Other polymerization and copolymarization products 24,342 15, Centrifugal pumps (other than those of heading 74281) 19,873 15, Wool; expanding or insulating mineral materials, nes 20,275 15, Harvesting and threshing machines; fodder presses, etc; parts nes 20,640 14,846 3,188 Air pumps, vacuum pumps and air or gas compressors 19,930 14, Pharmaceutical goods, other than medicaments 22,070 14, Interchangeable tools for hand or machine tools (tips, blades, etc) 21,703 14, Other non-electric parts and accessories of machinery, nes 22,044 14, Machinery, plant, laboratory equipment for heating and cooling, nes 22,700 14, Chemical products and preparations, nes 22,738 14, Construction and mining machinery, nes 13,781 13, Acrylic and methaacrylic polymers; acrylo-methacrylic copolymers 19,578 13, Articles of iron or steel, nes 18,347 13, Other food-processing machinery and parts thereof, nes 23,284 13, Switches, relays, fuses, etc; switchboards and control panels, nes 17,255 13,389 2,356 Source: UN COMTRADE, staff calculations.