Dhaka Reaches Out to Neighbors: Economic Development and Resilience Amid COVID-19

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Uzbekistan is now at an important turning point, five years after having embarked on an unprecedented economic and social transformation.

Five years ago, it was very difficult to develop a business in Uzbekistan.

A binding constraint on business growth and job creation was the availability of foreign currency. About half of Uzbekistan’s foreign exchange trade was conducted in informal markets.

The tax system was a burden on the economy. High taxes have made it unprofitable to grow businesses or create new jobs. Hiring workers was exceptionally expensive due to high taxes on labor. Tax evasion was widespread and government revenues depended on a small number of large taxpayers.

Strict regulations restricted businesses. Complex licensing requirements have reduced competition in the market and limited supply chains. Long delays at the border have increased the costs and losses of high-value horticultural exports from Uzbekistan.

These constraints have not only increased costs for businesses, but also increased corruption and inefficiency, which has eroded the competitiveness of Uzbekistan’s formal business sector. This allowed a thriving underground economy to function.

But that was five years ago. Today things are much better.

It is now easy to get currency. Although informal markets still exist, bank and bazaar rates have rarely diverged, and hardly anyone 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.

As a result of the 2018 tax reforms, around 1.4 million new citizens and businesses registered as taxpayers because it became easier to pay taxes than to evade them. Government revenue collection has increased, despite sharp reductions in tax rates.

The regulatory and commercial environment for business is much friendlier today. New business registrations, horticultural exports, tourism and foreign investment in local businesses have all increased in record numbers.

Thanks in large part to these reforms, Uzbekistan maintained positive annual economic growth in 2020, when most countries saw their economies contract.

The reforms have also been adapted to respond to the challenges imposed by COVID-19. Measures to strengthen social protection and reduce poverty have progressed more rapidly, spurred by efforts to protect people’s lives and livelihoods. Today, the focus is more on improving health and education systems.

Uzbekistan’s reforms over the past five years have been impressive. But more is needed to unlock the country’s full potential.

To halve poverty and achieve upper middle income status by 2030, Uzbekistan needs more and better jobs. Before 2017, around 600,000 new job seekers were competing for less than 200,000 jobs. Although more jobs have been created in recent years, unemployment remains a challenge.

How can Uzbekistan accelerate job creation to achieve its development goals by 2030? There are four important ways.

Allow the private sector to develop. Although the business environment has improved, companies still struggle to access land, capital and reliable inputs like energy. Insufficient competition, infrastructure gaps and limited integration with global markets also hamper the emergence of a private sector that creates more and better jobs.

More than 2,000 state-owned enterprises still dominate the economy and prevent the private sector from developing further. Faster privatization, especially of small state-owned enterprises and banks, could help the Uzbek private sector to grow and create more jobs in the economy.

Create a more empowering state. It is an important moment to reshape the role of the state in the economy, from producer to facilitator. Laws and regulations must be simpler, fairer and more transparent. Public investment is still heavily directed towards state enterprises. Better infrastructure and public services are needed to support promising new sectors of the economy such as horticulture, tourism and services.

The regions of Uzbekistan need more power to determine and finance their local development priorities. This will help to better exploit the different comparative economic advantages of the regions and allow for a wider sharing of prosperity across the country.

Increase investments in people. Skills shortages significantly hamper business investment. Although higher education enrollments and investments in skills and vocational training have grown 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 inequalities and high youth unemployment, will have a significant impact on Uzbekistan’s human capital.

Improve environmental sustainability. Uzbekistan’s economy is one of the most resource-intensive in the world. This model is not viable because oil and gas reserves are running out. Climate change has made water scarce. Faster decarbonization and greener growth policies will increase the sustainability of Uzbekistan’s growth. Improving sustainability is not just about managing risk or supporting future generations. It can also create new markets and new jobs today.

These are not easy reforms to implement. They will require careful implementation and close monitoring to ensure that results, such as job creation, private sector growth and greater environmental sustainability are achieved. If well managed, these reforms will promote greater job creation. They will accelerate the economic transition while providing more prosperity to all Uzbek citizens.

I look forward to my visit this week and to discuss these issues at the Tashkent Economic Forum.

* Originally published in Kun.uz and Gazeta.uz on September 27, 2021, via world Bank


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