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PONARS EURASIA
WORKING PAPER
Can Uzbekistan’s Economy Retain its High Growth Rate?
SCENARIOS OF ECONOMIC DEVELOPMENT IN 2015-30
By Vladimir Popov
New Economic School, Moscow
December 2014
PONARS Eurasia working papers are circulated to help authors solicit feedback on work in progress.
The author welcomes comments at vpopov@nes.ru.
IERES • THE INSTITUTE FOR EUROPEAN, RUSSIAN AND EURASIAN STUDIES
PONARS Eurasia is an international network of academics that advances new policy
approaches to research and security in Russia and Eurasia. PONARS Eurasia is based at the
Institute for European, Russian and Eurasian Studies (IERES) at the George Washington
University’s Elliott School of International Affairs. This publication was made possible by
grants from Carnegie Corporation of New York and the John D. and Catherine T. MacArthur
Foundation.
The statements made and views expressed are solely the responsibility of the authors.
PONARS Eurasia
Institute for European, Russian and Eurasian Studies (IERES)
Elliott School of International Affairs
The George Washington University
1957 E Street NW, Suite 412
Washington, DC 20052
Tel: (202) 994-6340
www.ponarseurasia.org
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ABSTRACT
Uzbekistan over the past ten years has had an extremely successful
economy, with high growth rates (8%), low domestic and international
debt, an undervalued exchange rate, a relatively even distribution of
income, and a created-from-scratch, competitive, export-oriented auto
industry. It is important, though, to avoid any “dizziness from success”
and to envisage possible growth traps in its future. This paper discusses
two unfavourable scenarios: trade shocks due to a decline in cotton, gas,
and gold prices (e.g., a deterioration of its current account balance by 10
p.p. of GDP) and a decline in growth rates of total factor productivity
(TFP). Also considered are the possible government responses to these
potential negative occurances, in particular changes in the government’s
industrial policies.
In recent years, Uzbekistan has been promoting heavy chemistry
industries (primarily the production of synthetic fuel and polypropylene
goods from natural gas). This is the “next stage” of industrial policy after
reaching food and energy self-sufficiency and successful auto industry
development. There are reservations, however, about this stage and
strategy. First, gas production is about to decline due to depletion of
reserves. Second, the level and growth rates of TFP in heavy chemistry
are by far not the highest (they are the highest in light and food industry
and in machine building). An increased share of heavy chemistry of total
industrial output will cause a decline in the level and the growth rates of
TFP. Third, the auto industry is already a success, thus it may be
reasonable to continue to support machine building industries,
particularly those involving medium-level technology. Finally, for a
country of this “average size,” the export specialization in two major
areas (autos and heavy chemistry) may prove to be excessive.
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Vladimir Popov
Can Uzbekistan’s Economy Retain its High Growth Rate?
SCENARIOS OF ECONOMIC DEVELOPMENT IN 2015-301
By Vladimir Popov
Uzbekistan has had the most successful economy in the former Soviet Union (FSU). In
2013, its GDP was double its 1989 level. Among the countries of Eastern Europe and the
former Soviet Union, only Turkmenistan and Azerbaijan could have had a doubling of
GDP—due to their natural resource export capacity, which Uzbekistan does not have,
though it does export gas and gold. Among transition economies, only China and
Vietnam have had more impressive growth. The external and domestic public debt
levels in Uzbekistan are low, its foreign exchange reserves are large, and its the
exchange rate is not overvalued (Popov, 2014).
Moreover, the government of Uzbekistan, through a strong industrial policy, has
managed to encourage and carry out large-scale progressive structural shifts—it
achieved energy and food self-sufficiency, the share of industry in GDP, as well as the
share of machinery and equipment in total industrial output and in export increased. A
whole new branch of industry—its automotive industry—was created from scratch,
became competitive and now exports half of its products. In 2013, Uzbekistan sold
abroad about 100 thousand cars, almost as much as Russia, whose GDP is 25 times
larger.
Income distribution in Uzbekistan is more even than in most other FSU countries, there
are no billionaires, crime is low, and life expectancy is much higher than in countries
with similar levels of per capita income.
In general, from all points of view, Uzbekistan looks like a very successful economy, so
that the main task today, apparently, should be to prevent "dizziness from success", to
envisage possible economic risks for the future and to develop adequate government
policy responses, needed to maintain economic growth of the past 10 years (8%).
1 The paper reflects the views of the author and not of the organisations with which the author is affiliated.
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How to predict long-term growth
Growth theory gives the following formula for growth accounting—decomposition of
growth (increase in output) by factors:
dY = TFP + a * dK + (1-a) * dL, where
dY —economic growth (GDP)
dK—growth rate of fixed capital,
dL—the growth rate of labor (employment)
TFP—the growth rate of total factor productivity (TFP)
a—the parameter of the production function, interpreted as the share of capital in
national income and equal to about 0.4 for developing countries and 0.3 for developed
countries.
Population growth and the working age population (and, hence, employment, assuming
the unemployment rate unchanged) are known quite accurately—demographic
processes are characterized by high inertia that allows to make high-quality forecasts. In
particular, the UN forecast suggests that by 2030 the total population and working-age
population of Uzbekistan will grow at a rate of about 1% per year (Fig. 1). Therefore, in
accordance with the formula for growth accounting the growth of employment will
contribute about 0.6 percentage points (p.p.) to annual growth of GDP.
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Vladimir Popov
Fig. 1. Entire population and working-age population, the UN forecast, thousand
persons
Source: UN Population, 2014
A few percentage points of GDP growth per year can be obtained from the increase in
total factor productivity. In 1997-2009 growth rates of total factor productivity ranged
from 0 to 4% (Chepel et al 2010), so that under favorable conditions one could expect
growth of 2-3% per year.
Therefore, to achieve annual GDP growth of 8-9%2, over 50% of growth (5-6 p.p.) must
come from the contribution of capital
a*dK/K = dY/Y—TFP—(1-a)*dL/L,
Hence capital stock must grow at 12-15% per year (dK/K = 6%: 0.4 = 15%). And if the
capital-output ratio is equal to 2 (K/Y = 2) and if, for the sake of the argument, the
retirement of fixed capital stock is equal to zero (dK = GR, R = 0, where G—gross
investments, R—retirement) the share of investment in GDP (G/Y) should be maintained
at 30% (G/Y = dk/Y = dK/K * K/Y = 15*2 = 30%). If the capital-output ratio would be
2 To achieve the proclaimed goal of per capita GDP of $7000 in 2030 (in prices of 2012) from the actual level
of $1720 in 2012 (at market exchange rate), the annual growth of per capita GDP should be 8%. If population
growth would be 1% a year, GDP will increase annually by about 9%.
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higher than two and/or retirement will be higher than zero, the share of investment in
GDP will have to be increased even more to maintain the growth rate of 8-9%.
In recent years, the share of investment in GDP in Uzbekistan was significantly lower—
18-27% in 2000-12 (Fig. 2). It was particularly low in 2002-06 (18-21%), even though
external conditions were favorable (high world prices for major export products—gas,
gold, cotton) and there was a significant surplus on current account.
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Vladimir Popov
Fig. 2. Share of investment in GDP, %, current account balance as a % of GDP and
GDP growth rates in 1987-2012, % (Source: WDI)
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Mystery of total factor productivity
There are many papers that analyze factors of growth of TFP (see literature review in
UNIDO, 2007). In neoclassical theory, total factor productivity growth is exogenous, i.e.
determined outside of the model, by external factors. Endogenous growth theory
attempts to explain changes in total factor productivity (labor and capital) by
investments in fixed capital stock, education, R&D, foreign direct investment, the quality
of institutions, openness of the economy and many other variables. Empirical studies,
however, have not yet allowed us to confidently predict the growth rate of total factor
productivity.
In 1994, Paul Krugman, based on growth accounting calculations in East Asia by Alvin
Young, argued that the puzzle of the East Asian growth does not exist (Popov, 2002;
2010). He argued that Asia's rapid growth was mainly extensive, as in the USSR, that is
was due to accelerated accumulation of capital, and was not caused by the growth in
total factor productivity. He concluded that there was no great mystery in this growth at
all: if the country is ready to devote more than one third of its GDP to investment,
limiting consumption, then it can reach high growth rates.
In the classical theory of economic growth it is assumed that an increase in one factor of
production without a proportional increase in other factors inevitably leads to
diminishing returns: for example, an increase in investment in machinery and
equipment without a corresponding increase in employment will produce smaller and
smaller increments of output. Therefore, to bet on investment alone—to rapidly
accumulate physical capital—is not a reasonable strategy: capital efficiency will fall, so
that the acceleration of growth, if happens, would be most insignificant.
As an example, the advocates of this theory referred to the economic growth in the
USSR, which was very high in the 1950s (8% annually), and then fell to 2-3% in the 1980s
due to, as they thought, over-accumulation of capital: the share of investment in GDP in
this period increased to as much as 35%, fixed capital formation proceeded rapidly, but
the results were more than modest. As Alice in the Wonderland once put it, it was
necessary to run twice as fast to stay in the same place. Or, as the Economist once wrote,
the Soviet Union brought the share of investment in GDP to the Japanese level with very
“un-Japanese” results.
It was believed that the Soviet economic dynamics is the best illustration of classical
growth theory (Solow model): if the contribution of technical progress is negligible, as it
was in late USSR, i.e. if the growth is predominantly extensive, it is impossible to
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Vladimir Popov
maintain high growth for a long time only with high investment; at the end of the day
growth rates will inevitably fall, approaching the rate of population growth.
Therefore, Krugman predicted that the rapid growth of East Asia will soon end as the
Soviet growth ended because of the depletion of reserves of labor—higher participation
rates for women and decline of rural population as a result of migration to urban areas.
Moreover, without the proportional increase in labor increased investment lead to
diminishing returns, efficiency of accumulation decreases, growth slows down.
However, time seems to have disproved Krugman’s predictions. After the East Asian
crisis in 1997, growth continued and there are no signs that the growth rate of total
factor productivity necessarily slows down as the share of investment in GDP increases.
Say, in China TFP growth rates did not decline, although the share of investment in GDP
has reached unprecedented levels in the world—almost 50%.
As can be seen from Fig. 3, in Asian countries with relatively low GDP per capita (from
$2700 to $6200 PPP –purchasing power parity) and in middle income countries (from
$9,000 to $17,000 at PPP) TFP growth rates rose rather than fell, whereas in richer
countries, including the U.S., they seem to have remained stable. TFP growth in the
developed countries and territories (Hong Kong, Singapore, United States, Taiwan,
South Korea, and Japan) usually did not exceed 2% (Fig. 3). In the United States—a
country that was in the past 100 years at the forefront of technological progress, the
growth rate of TFP was in 1870-2010 of the order of 1-2% and only in certain periods (the
Great Depression of the 1930s, when both employment and capital declined sharply,
World War II) rose to 3% (Table 1).
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Fig. 3. Rates of growth in total factorial productivity in Asian countries with different
levels of income per capita and in the U.S. in 1970-2010
Countries with a per capita GDP at PPP from $2700 to $6200 in 2012
Countries with a per capita GDP at PPP from $9000 to $17,000 in 2012
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Vladimir Popov
Countries with a per capita GDP at PPP from $30,000 to $52,000 in 2012
Source: APO (2013)
Table 1. Growth rate of total factor productivity in the U.S. in 1870-2010, %
Period
Average annual TFP growth rates
1870 to 1900
~ 1.5% to 2%
1900 to 1920
~ 1%
1920s
~ 2%
1930s
~ 3%
1940s
~ 2.5%
1950 to 1973
~ 2%
1973 to 1990
< 1%
1990s
> 1%
2000s
~ 1.5%
1870 to 2010
~ 1.6% to 1.8%
1950 to 2010
~ 1.2% to 1.5%
Source: Shackleton (2013)
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In most successful catch-up economies (China, Iran, Malaysia, and Thailand) TFP
growth often exceeded 5% per year (Fig. 3). However, in countries with similar to
Uzbekistan per capita income level, TFP growth was no higher than 3% (Fig. 3). So it
makes sense to assume that under the most favorable circumstances TFP growth in 2015-
30 would remain at the level of 2—3%.
Scenarios for the future growth
Favorable scenario. TFP growth rates do not slow down, remain at the level of 2-3% per
year, export prices remain high, so that the trade balance and balance of payments on
current account are in surplus. In this case, to ensure the growth of 8-9% the share of
investment is expected to grow somewhat by the end of the period (2030) only if capital
–output ratio would increase and higher share of investment in GDP would thus be
required to achieve the same growth of fixed capital stock (15%)—Table 2.
Under this option, there may be a gradual return of migrants working abroad. On the
one hand, their return will reduce remittances that will negatively affect the balance of
payments. On the other hand, if they find a job in Uzbekistan in the export sector, losses
from reduced remittances can be compensated by the increase in foreign exchange
earnings from export growth. Moreover, the return of migrants can significantly increase
the rate of employment growth in Uzbekistan: the return of 100,000 people a year would
add 1 percentage point to employment growth, i.e. would add about 0.6 percentage
points to annual economic growth rate. But in this case it will be necessary to provide
returning migrants with jobs that would require an additional increase in the growth
rate of fixed capital—by 1 percentage point. To achieve such acceleration in growth of
fixed capital stock it would be necessary to raise accumulation rate (the share of
investment in GDP) by 2 p.p., for example, from 25 to 27% of GDP. This will provide
additional 0.4 percentage points GDP growth, so that economic growth will increase by
1 percentage point (0.6 % + 0.4%).
Unfavorable scenarios. Falling prices for the main items of the Uzbek exports—gold, gas
and cotton, which can cause deterioration in the trade and current account balances in
the amount of 10% of GDP (in the past 20 years, current account balance varied between
minus 7% and plus 9% of GDP—Fig. 2). As can be seen from Fig. 4, prices of these
products in the past 5 years were pretty high, so their decline in the future cannot be
ruled out.
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Vladimir Popov
Fig. 4. World prices for gold, oil and cotton, 1988-2013
Source: Index Mundi
(http://www.indexmundi.com/commodities/?commodity=cotton&months=300&commodity=gold&indicato
r=price-ratio)
In this case, there are different policy options: (1) devaluation of the national currency,
(2) reduction of foreign exchange reserves without sterilization operations of the central
bank, (3) reduction of foreign exchange reserves, fully sterilized by the central bank, that
is, without changing the money supply in circulation. In the third case, reduction of
saving can be avoided, but in the first two cases at least some reduction of private
savings and investment is inevitable, so to maintain the previous rate of economic
growth this decline should be compensated by increased public savings and investment.
Without such a compensation a reduction of savings and investment by, say, 10 p.p. of
GDP will cause a fall in the rate of growth of capital by 5 percentage points (K/Y = 2),
which can slow down economic growth by about 2 percentage points per year (dK*a =
5*0.4 = 2). To avoid a decrease in growth, it will be necessary to increase the rate of
accumulation by 10 percentage points through the mobilization of domestic savings
and/or attracting capital from abroad (Table 2).
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Table 2. Scenarios of economic development in 2015-2030
Scenario
TFP
growth
rate
Current accounts
balance
Change in
annual
growth rates
Increase in investments
necessary for sustainable
growth
Basic—favorable
2-3%
Unchanged (at levels
of 2010-13)
0
0 (stays at current level of
25 % of GDP)
Unfavorable—
worsening of terms
of trade
2-3%
Decrease by 10 % of
GDP
Decrease by
2 pp.
Increase by 10 p.p. of GDP
(up to 35% of GDP)
Unfavorable—
decrease in TFP
growth rate
0%
Unchanged (at levels
of 2010-13)
Decrease by
2-3 pp.
Increase by 10-15 p.p. of
GDP (up to 35-40% of GDP)
Worst case
0%
Decrease by 10% of
GDP
Decrease by
4-5 pp.
Increase by 20-25 p.p. of
GDP (up to 45-50% of GDP)
Another unfavorable scenario—the slowdown of growth of total factor productivity by
2-3 percentage points, i.e. to about zero from the current level. This could happen
because of the shifts in sectoral structure of production towards capital-intensive
industries, due to the depletion of mineral deposits, due to massive investments in
infrastructure and human capital (irrigation, roads, education, health), which do not
produce immediate returns. This could also happen for reasons that we do not know. As
was argued previously, to predict with certainty the dynamics of TFP in future is not
possible, so it is only prudent to be prepared for unfavorable scenarios of change. In this
case, economic growth will fall by 2-3 percentage points and an increase in investment
required to compensate for this decline, will amount to 10-15% of GDP (Table 2).
Worst-case scenario. If the deterioration of terms of trade coincides with a decrease in
the rate of growth of total factor productivity, there may be a decline in economic
growth rates by 4-5 percentage points, i.e. more than twice. To compensate for this
reduction, the share of investment in GDP would have to rise to 45-50% (Table 2), which
seems hardly possible in a short period of time.
How can the government respond to the downside risks?
To compensate for the decline in growth due to possible deterioration of terms of trade
and (or) falling growth rates of total factor productivity it is possible to increase
investment financed via internal or external (capital inflows) savings. Strictly speaking,
this is virtually the only way to counter the slowdown, as the growth of TFP and labor
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Vladimir Popov
(employment) are determined largely by objective factors, that is, cannot be easily affected by
government policy.
Luckily, to mobilize additional savings Uzbekistan has significant reserves. Firstly, the
current savings rate—less than 25% of GDP—is not too high, many countries with a
similar level of development have higher share of savings and investment in GDP. The
share of investment in GDP in 2012 in Botswana, Belarus, China, India, Indonesia, Laos,
Lesotho, Mauritania, Niger, Tanzania, Tonga was 30% or more, whereas in China,
Mongolia, Mozambique, Turkmenistan it was over 40%. Secondly, the state budget is
balanced with a surplus, and the internal and external debt is low, so there is the
possibility of mobilizing savings through higher taxes, as well as via increase in
domestic and foreign borrowings to finance public investments.
As can be seen from Fig. 5, not only private but also public investments contribute to
increasing the share of investment in GDP. If for some reason private investments are in
limbo, the state can achieve the increase in total investments through the expansion of its
own public investment projects financed through taxes and/or borrowings. Government
savings (financing public investment through government budget and/or budget
surplus), as the studies show, do not crowd out private savings in a proportion of 1:1,
but only in a proportion of 25-50 cents for every dollar ((Schmidt-Hebbel, Serven, and
Solimano 1996). In low income countries, as recent research shows, an extra dollar of
government investment does not crowd out, but crowds in private investment—raises
them by roughly two dollars and output by 1.5 dollars (Eden, Kray, 2014).
Strictly speaking, even under a favorable scenario it is advisable to strive to increase the
share of investment in GDP in order to increase investment in infrastructure, education,
health—areas that experienced a distinct lack of funding in the 1990s and in the 2000s.
This will lay the foundations for the future growth and will allow avoiding surprises
associated with aging and retirement of worn-out assets.
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Fig. 5. Private and public investment as % of GDP in 2012
R² = 0.3239
0
10
20
30
40
50
60
0 5 10 15 20 25 30 35 40
Gross fixed capital formation, % of GDP
Public investment, % of GDP
Gross investment and public investment in 2012, % of GDP
Turkmenistan
China
Mongolia
Mozambique
Guinea-Bissau
Turkmenista
Chin
R² = 0.6537
0
10
20
30
40
50
60
70
010 20 30 40 50 60
Gross fixed capital formation, % of GDP
Private investment, % of GDP
Gross investment and private investment in 2012, % of GDP
Turkmenistan China
Mongolia
Mozambique
Guinea-Bissau
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Vladimir Popov
Source: WDI
Which industries should develop at faster pace?
Reduction of the share of industry in GDP and the increase of the share of services—an
objective process, but in the fast-growing countries (China), this decline was slower than
in the others (Fig. 6). At the same time the increase in the share of machinery and
equipment in manufacturing output, as in China (Fig. 6), usually accompanies rapid
growth or even becomes the engine of growth. We do not know of any cases of rapid
growth ("economic miracles"), which were based on accelerated growth of service sector.
Increase in the share of industry in Uzbekistan over the past decade should therefore be
considered a positive trend.
R² = 0.0006
0
5
10
15
20
25
30
35
40
010 20 30 40 50 60
Public investment, % of GDP
Private investment, % of GDP
Public investment and private investment in 2012, % of GDP
Turkmenista
Chin
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Fig. 6. The share of manufacturing and services in GDP, the share of industry in
employment, the share of machinery in manufacturing value added
Manufacturing value added as a % of GDP in BRICS countries and in the US
10
15
20
25
30
35
40
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
China
Brazil
Russia
South
Africa
India
United
States
Services value added as a % of GDP in BRICS countries and in the US
20
30
40
50
60
70
80
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
United
States
South
Africa
Brazil
Russia
India
China
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Vladimir Popov
Source: World Development Indicators
Employment in industry, % of total employnent
15
20
25
30
35
40
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Russia
China
South
Africa
India
Brazil
United
States
Machinery and transport equipment, % of value added in manufacturing in
BRICS countries and in the US
8
13
18
23
28
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
United
States
China
Brazil
India
South
Africa
Russia
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What are the particular manufacturing industries that could become the engine of
growth is a difficult question. Unfortunately, economic theory does not suggest any
definite clues, except the idea that these industries should have the highest externalities,
i.e. their social returns should be higher than private returns. But it is not so easy to
measure these externalities. There may be several ways, though, to determine the
industries that should be supported in the framework of industrial policy.
One could benefit from the experience of other countries: it is known that relatively poor
countries began to export textiles and shoes, then moved to the export of steel products
and heavy chemicals, then—to the export of cars and electrical products (washing
machines, refrigerators), then—to consumer electronics and computers. This scheme is
called the "flying geese"—as more competitive countries move to more advanced types
of export, the vacated niches are occupied by less developed countries.
The transition from one exported good to the other could be dictated by the cycle of
innovations. As Lee (2013) suggests, this cycle is short for electronics and long for
pharmaceutical and chemicals; this may explain, why East Asian countries that mostly
focused on industries with short cycles managed to avoid growth slowdowns while
moving from one export niche to another. Justin Lin, the former chief economist of the
World Bank, developed the idea of comparative advantages following and comparative
advantages defying industrial strategy: the best result, according to his argument, could
be achieved, if countries develop industries that are consistent with their comparative
advantages, determined by their endowment structure, and do not try to overleap
necessary stages aiming at exporting goods that are exported by very advanced
countries (Lin, 2011).
An opposite approach is that of Hausmann, Hwang, Rodrik (2006). They show that the
gap between the actual level of development and the hypothetical level that corresponds
to the degree of sophistication of a country’s exports is strongly correlated with
productivity growth rates (Hausmann et al., 2006; Rodrik, 2006). To put it differently, it
pays off to promote exports of sophisticated and high tech goods. Not all the countries
that try to promote such exports succeed, but those that do not try, virtually never
engineer growth miracles3.
One can also try to support several industries that seem promising, declaring that
assistance will end, if the increase in export is not achieved within, say, five years. This is
3 The only exception could be Botswana that had the highest rate of per-capita income growth in the world
in 1960-2000. This growth was primarily driven by exports of primary commodities (namely, diamonds) and
not of high-tech goods.
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Vladimir Popov
called "EPconEP"—effective protection conditional on export promotion (Jomo, 2013).
Economic policymaker in this case is similar to the military commander, who begins an
offensive on several fronts, but throws reserves where there has been a breakthrough.
One can try to calculate where, in which specific industries, limited investment will give
the greatest effect leading to the creation of globally competitive production. Most likely,
these would be industries with the highest level and highest growth rates of total factor
productivity, industries that lag behind the most advanced countries less than the
others.
Finally, it is possible to choose candidates for support largely at random. It is only
important to be consistent—embarking on the path of support of a particular industry,
not to turn back, even if there is no immediate success and a breakthrough in the world
markets. After all, the modern theory of international trade explains country
specialization not by comparative advantages, but by "learning by doing.”
If the country does not have any comparative advantage, like, say, post-war Japan, it is
necessary to create them ("dynamic comparative advantages"), mastering the production
of goods that have not been produced before. Supporting such production and
consistently encouraging exports, staying on track and without turning back for some
time, is likely to produce a learning- by-doing effect, allowing the country to gradually
becoming competitive. As the saying goes, if Japan (that does not possess any minerals
or extensive areas of fertile land) would rely on comparative advantages, its exports
today would be not even sushi (which includes rice), but only sashimi.
Uzbekistan created from scratch the car industry, which today produces more than 200
thousand cars (and their engines), and half of them are exported (Popov, 2014). It is an
undisputable success of industrial policy, a breakthrough to the world markets with the
products of the medium level of research intensity, which previously could have been
achieved only by countries of higher level of development.
In recent years, however, the next round of industrial policy focuses on heavy
chemistry—Shurtan Gas Chemical Complex and the planned production of synthetic
liquid fuels based on purified methane together with South African "Sasol" and
Malaysian "Petronas," liquefied natural gas production at Mubarek gas processing plant,
Dehkonobod Potash Fertilizer Plant, Ustyurt gas chemical complex at Surgil deposit.
Such a strategy could create difficulties for economic growth.
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First, the gas reserves are close to depletion, it is projected that gas production will start
to decline from 2015 (World Bank, 2013), so the use of gas for the production of
polypropylene and other chemical products will lead to a decrease in energy self-
sufficiency. If the World Bank forecasts are correct (Fig. 7), Uzbekistan will have to
import more oil and (or) gas to satisfy domestic demand for energy, even though today
the country is a net exporter of fuel. Besides, production of synthetic liquid fuels from
gas will further reduce already low capacity utilization at two existing refineries in
Uzbekistan.
Fig. 7. World Bank Forecast of energy production and consumption in Uzbekistan till
2030
Source: World Bank, 2013
Second, the focus on the development of heavy chemistry industries can lead to the
slowdown of growth or even to the reduction of the level of TFP. Calculations by IFMR
(Chepel et al., 2014) show that the level of labor productivity and TFP and the growth
rates of these indicators in the past 10 years were the highest in engineering, light and
food industries, but not in petrochemicals and chemicals.
Thirdly, the focus on medium tech engineering goods (auto industry) has justified itself,
it is a proven route, perhaps it would be better to develop success in this area and along
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Vladimir Popov
these lines of specialization, rather than trying to create a new competitive industry from
scratch. The scale of the Uzbek economy may not be sufficient to specialize on more than
one group of industries.
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PONARS Eurasia Working Paper
Popov, V. (2010). Life Cycle of the Centrally Planned Economy: Why Soviet Growth Rates Peaked
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PONARS Eurasia working papers are circulated to help authors solicit feedback on work in progress.
The author welcomes comments at vpopov@nes.ru.
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