Uzbekistan - Adjusting social protection

Report No. 13023-UZ Uzbekistan Adjusting Social Protection December 20, 1994 Human Resources Division Country Department IlIl Europe & Central Asia Region Document of the World Bank  ACRONYMS AND ABBREVIATIONS CIS Commonwealth of Independent States COM Cabinet of Ministers CPI Consumer Price Index DALY Disability Adjusted Life Years EF Employment Fund ES Employment Service EU European Union FBS Family Budget Survey FSU Former Soviet Union GDP Gross Domestic Product GKI State Committee on Property and Privatization GNP Gross National Product IMR Infant Mortality Rate IUD Intrauterine Device MOF Ministry of Finance MOH Ministry of Health MSP Ministry of Social Protection NGO Non-Governmental Organization PYL Potential Years Lost PF Pension Fund S Sum (Uzbek national currency from July 1994) SC Sum Coupon (Uzbek national currency from January to July 1994)) SIF Social Insurance Fund (pre-merger with PF) SIFN Social Insurance Fund (post merger with PF) R Rouble TES Temporary Employment Schemes (sometimes known as public works schemes) UB Unemployment Benefit CURRENCY EQUIVALENTS Over the time of writing this report, the national currency of Uzbekistan has been very unstable. Until November, 1993, Uzbekistan used the CIS rouble. The sum-coupon was then introduced, officially on par with the Russian rouble, so that in April 1994, the official rate was US$1 = 1700. From July 1994, the currency has been the Uzbek sum. The exchange rate at currency auction was US$1 = 16 sum, as at late September 1994. As far as possible, this report avoids reference to nominal money figures.  Preface This report was prepared by Jeni Klugman and Philip O'Keefe (EC3HR). It is based on the materials and discussions at a joint Government of Uzbekistan/World Bank/GTZ Seminar on Labor Markets and Social Protection held in June 1993; as well as the findings of a mission led by Michael Mills in October 1993, including the contributions of Sheila Marnie (labor markets), Alan Thompson (social protection) and Jose-Luis Bobadilla (health). An earlier draft of the report was updated in April 1994 by Jeni Klugman following another mission to Tashkent. The report has also benefitted from the comments of relevant Ministries of the Government of Uzbekistan during Green Cover discussions in July 1994. Developments up to September 1994 have been included. Useful advice and comments have been received from Costas Michalopoulos and Michael Mills and several colleagues, including Martha de Melo, Betty Hanan, Robert Hecht, Helga Muller, Laura Tuck and Silvina Vatnick. Annie Minofu provided patient secretarial support. Russell Cheetham and Robert Liebenthal were Director of the Department and Chief of the Human Resources Division respectively during preparation.   TABLE OF CONTENTS EXECUTIVE SUMMARY ..................................... i Worsening Economic Conditions .............................. i Lack of labor market reform ................................. ii Serious Poverty ......................................... ii The challenges facing Uzbekistan .............................. iii Options for Making the System of Social Protection .................. vi Improving quality and efficiency in the health care system .............. xi Meeting the Challenges ................................... xiii CHAPTER 1: THE MACROECONOMY AND HUMAN DEVELOPMENT ...... 1 The Inheritance ....1................................... Developments Since Independence ............................. 2 Human Development Indicators and Trends ....................... 5 Patterns of Poverty and Inequality ............................. 6 Pressures on Social Expenditure .............................. 7 CHAPTER 2: THE CHALLENGES ............................... 10 Rapid Population Growth .................................. 10 Severe Fiscal Constraints .................................. 11 Rising Open Unemployment ................................ 12 Enterprise Restructuring and Divestiture of Social Assets ............... 13 Providing Minimum Levels of Social Protection ...... . . . . . . . . . . . . . . 14 Including Women and Other Groups ....... . . . . . . . . . . . . . . . . . . . . 16 Increasing Rural-Urban Disparities ....... . . . . . . . . . . . . . . . . . . . . . 16 CHAPTER 3: LABOR MARKETS ....... . . . . . . . . . . . . . . . . . . . . . . . . . 18 Context ........... .. .. .. .. . .. .. .. .. .. . .. .. .. .. . .. .. . 18 Structure of Employment and Emerging Trends ..... . . . . . . . . . . . 20 Recent Trends in Wages and the System of Wage Setting ..... . . . . . 21 Unemployment ......... .. . . .. . . .. . .. . . .. . . .. . . .. . . .. . . 22 The Employment Service and Employment Fund ...... . . . . . . . . . . . . . . 26 Unemployment Benefits ....... . . . . . . . . . . . . . . . . . . . . . . . . 28 Training ......... .. . . .. . . .. . . .. . . .. . . .. . . .. . .. . . 30 Job Creation and Temporary Employment Schemes ..... . . . . . . . . . 31 Provision for Mass Lay-Offs ....... . . . . . . . . . . . . . . . . . . . . 32 Other Activities ........ . . . . .. . . . . . . . . . . . . . . . .. . . . . . 33 Future Role of the Employment Service ...... . . . . . . . . . . . . . . . 34 Wages Policy .......... . .. . . .. . .. . .. . . .. . .. . .. . . .. . .. . 36 Women in the Labor Market ....... . . . . . . . . . . . . . . . . . . . . . . . . . 38 Rural Labor and Labor Mobility ....... . . . . . . . . . . . . . . . . . . . . . . . 40  CHAPTER 4: CONSUMER SUBSIDIES ............................. 42 The Problem .............................. 42 Current Trends .............................. 43 The Costs .............................. 46 Food Subsidies ................................ 46 Meal Programs ........ ............................ 48 Non-food Subsidies ..................... 49 Administration and Financing .................... 52 Impact and Incidence. . .................. 52 Recommendations on Subsidy Reform ........... . .. .. .. . .. .. .. . 54 CHAPTER 5: SOCIAL INSURANCE ............... ... .. ... ... ... . 57 Pensions. ....................................... 57 Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Payment of Pensions .................................... . 63 Social Insurance Fund Administration ........ .. . . . . .. . . . . . . 64 Options for Pension Reform ............ ... .. .. .. .. ... . . 65 Raising Pension Ages .................. .... .... .... . . 66 Reducing High Pension Benefits ........... . .. .. .. . .. .. .. . 67 Costing the reform options .............. .. ... .. ... .. .. . 68 Strengthening Pension Administration ........ .. . . . . .. . . . . . . 70 Sick Pay and Other Benefits .................. .... .... .... . . 72 CHAPTER 6: SOCIAL ASSISTANCE ............... .. ... ... ... ... . 76 Family allowances ..................................... . 76 Structure and Financing ................. ... ... .... ... . 78 Increasing Pressures ..................... ..... .... .. . 78 Reform Proposals for Income Testing in 1993 ........ . . . . . . . . . . . . . 80 Recent Reforms to Social Assistance ........... ... .. .. .. .. .. . . . 81 Maternity Benefits ...................................... 84 Privileges ........................................ 85 Targeting Options ....................................... 86 Choice of Targeting Mechanism ........... . .. .. .. . .. .. .. . 88 CHAPTER 7: HEALTH ...................................... 90 Health Status ....................................... 90 The Burden of Disease ................ .... ... ... .... . 90 Infant M ortality ................................... 93 Adult M ortality .................................... 94 Family Planning ................................... 95 Nutrition .................................. 96 Risk factors . ................................ 97 Health Care Provision and Financing ................ ... ... ... . . 99 Infrastructure and Personnel ..................... ..... . . 100 Organization and Financing ..................... .... .. . 101  Reforming Health Care Delivery ....... . . . . .......... . . . . . . . . . 103 Restructuring of Services ....... . . . . .......... . . . . . . . . . 103 Drugs Policy ......... .. . . . ............ . .. . . .. . .. . 104 Financing .......... .. . .. ............ .. . .. . .. .. . . 105 Privatization in Health Care ....... . . . ......... . . . . . . . . . 106 The Draft Health Law ......... . .. . . ............. . . .. . . .. . 107 Problems with the draft law ....... . . . ......... . . . . . . . . . 108 CHAPTER 8: CONCLUSIONS ......... . . . . .. . . . . .. . . . . . .. . . . . . . 110 The Future Structure and Level of Benefits ..... . .......... . . . . . . . 110 Towards a Fiscally Sustainable System of Social Protection . ........ . . . . 112 Strengthening Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Minimizing administrative inefficiencies ...... ......... . . . . . . 113 Training ............... . ...................... . . 114 Improving coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Annex 1: PAYG and Funded Pension Systems .... . ........... . . . . . 115 Annex 2: Targeting - Individual Assessment Methods . . ......... . . . . . 116 Annex 3: Equivalence Scales ......... . . ........... . . . . .. . . . 118 Annex 4: Potential Years Lost (PYL) And Disability Adjusted Life Years . . . . 119 Glossary ................ . . ..................... ... . . 121 Bibliography ............... . ......................... . 122  List of Tables, Figures and Boxes Table Boxes Table 1.1 Total factor productivity growth . . ....... ....... ... 2 Table 1.2 Shares of Soviet population with per capita income ..... . . . . . 3 Table 1.3 Federal revenue and expenditures . ..... . . 4 Table 1.4 Demographic profile of Uzbekistan, 1991 ...... . . . . . . .. 6 Table 1.5 Gini coefficients and decile ratios ..... . . . . . . . . . .. 7 Table 2.1 Unemployment structure by selected characteristics . ......... . 13 Table 2.2 Subsistence minimum income, March 1994 .. . ......... . . . . 15 Table 2.3 Annual average per capita minimum consumption . ........ . . . 16 Table 3.1 Registered unemployed by region, Sept. 1993 ... ....... . . . . 24 Table 3.2 Main categories of unemployed, duration and level of benefits . .. . 30 Table 3.3 Distribution of gross monthly earnings in Rubles .. ...... . . . 40 Table 4.1 Budget expenditure on consumer subsidies .. . ......... . . . 44 Table 4.2 Comparison of prices in state stores ..... . . .... 46 Table 4.3 Selected food subsidies, 1993 .................... . 48 Table 4.4 The path of certain foodstuff prices ...... ........ . .. 55 Table 5.1 Pensioners by category, and average pension, 1993 . ...... . 58 Table 5.2 Pension Fund budget 1991-1993 ....... ........ . . . . . . 62 Table 5.3 Monthly cost of pensions under old and current law . ...... . . . 64 Table 5.4 Relative cost of pensions under different pension structures .... . . 70 Table 5.5 Sick pay levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Table 5.6 Social Insurance Fund Budget - 1992 and 1993 . .......... . 75 Table 6.1 Uzbekistan: Family Allowances 1990-1994 ... .......... . . 79 Table 6.2 A Taxonomy of Targeting Mechanisms ...... ....... . . .. 87 Table 7.1 Selected Demographic and Health Statistics . ............. . 91 Table 7.2 Morbidity: Annual Prevalent of Diseases Registered at Health Delivery Facilities (1991) ..... . ......... . . . 92 Table 7.3 Major Causes of Infant Mortality in Uzbekistan, 1992 ..... . 95 Table 7.4 Rural Population Access to Drinking Water . ........... . 99 Table 7.5 Health Infrastructure in Uzbekistan .... . ......... . . . . 100 Table 7.6 Human and Material Resources for Health in Uzbekistan ..... . 102 Table 7.7 Public Health Expenditures of Selected Countries, 1992 ..... . 103 Table 7.8 Breakdown of Health Budget, 1991-93 . .............. . 105 Figure Boxes Figure 1 Uzbekistan Expenditure in Social Protection ..... . . . . . . . . . iv Figure 2 Pension Benefits and Population ...... . . . . . . . . . . . . . . . vii Figure 3 Social Expenditure in Uzbekistan .x..... . . . . . . . . . . . . . . Xiii Figure 1.1 Uzbekistan Expenditure Trends in Social Protection ..... . . . . . . 9 Figure 3.1 Structure of Employment by Type of Employer ..... . . . . . . . . 20 Figure 3.2 Minimum and Average Wages ...... . . . . . . . . . . . . . . 23 Figure 3.3 Unemployment Projects for Uzbekistan ................. . 26 Figure 5.1 Pension and Population Above the Age of 80 .............. . 61 Figure 8.1 Social Expenditure in Uzbekistan ................... . 113  Text Boxes Box 2.1 Methodological Issues in Soviet Data and Living Standards ..... . 8 Box 3.1 Labor Statistics in Uzbekistan ....... . . . . . . . . . . . . . . 21 Box 3.2 Unemployment in Central and Eastern Europe ............. . 25 Box 3.3 Dealing with Enterprise Restructuring in Former East Germany . . . 34 Box 3.4 World Bank and EU support for the ES ........ . . . .. . . . 35 Box 4.1 The Potential Role of Nutrition Programs and the Case of Honduras 45 Box 4.2 The cost of Implicit Grain Import Subsidies ............. . 50 Box 5.1 Selected Categories of Early Pensioners under the new Pension Law 59 Box 5.2 Social Protection Offices in Dzhizak Oblast, Oct. 1993 . . . . . . . . 65 Box 5.3 Yakkasaray and Sergeci Raion Pension Fund Offices, Tashkent . 66   ADJUSTING SOCIAL PROTECTION IN UZBEKISTAN EXECUTIVE SUMMARY 1. The welfare of the people of Uzbekistan has been, and will continue to be, under serious pressure in the face of falling output and high inflation. Enterprise restructuring that will accompany necessary economic reforms will increase open unemployment. At the same time the system of social protection and the delivery of basic social services will continue to be adversely affected by severe fiscal constraints. This report analyses the social challenges facing Uzbekistan, focussing upon labor and employment, social protection and health care. 2. The Government has already expressed its intention to shift from universal consumer subsidies to a targeted system focussed on protecting the poor. However, progress on the economic reform front requires further actions to reorient the structure and level of cash benefits, as well as coverage and eligibility. Macroeconomic stabilization and the transition from a command economy require a reduction in, as well as a reorientation of, social protection expenditure. This will be difficult in a context of economic restructuring, rising unemployment, increasing inequality and increasing numbers of youth entering the labor market. Labor market reforms, in particular with respect to wage policy, are necessary in the course of the shift to a market oriented economy. 3. The transition to a market economy will involve a fundamental reorientation of the role of government in the system of social protection and the labor market. The government has issued statements and commitments to liberalize prices, limit the budget deficit and target assistance and define the poverty line. However, policy slippage has already occurred, and there is a need to address reforms to the social safety net more comprehensively. Worsening Economic Conditions 4. In Uzbekistan, the weaknesses of the command economy became increasingly apparent in the 1980s. Productivity growth was actually negative for the period 1970-90 and among the worst in the former Soviet Union. Despite large transfers from the Union budget, rising to almost 20% of the Republic's GDP in 1991, poor economic performance had strained Uzbekistan's ability to maintain previous levels of welfare and service provision. 5. After independence, the Government followed a more gradual and partial approach to economic reform than its neighbors. Therefore, declines in key indicators are apparent. Real output declined by about 13% between 1991 and 1993, and is projected to fall by about 8% in 1994. Inflation has become a serious problem, although less so than in Russia and Kazakhstan for example. Retail prices rose by an estimated 650% in 1992 and by over 1000% in 1993. 6. The system of subsidies, credits and transfers that has evolved in Uzbekistan is not sustainable. World Bank and International Monetary Fund estimates suggest that the consolidated budget deficit was around 15.4 percent of GDP in 1993. A significant part of the imbalance can be traced to transfers to support inefficient enterprises.  Lack of labor market reform 7. Despite certain steps toward liberalization, the labor market in Uzbekistan remains heavily controlled. This is evident in recent Presidential Decrees--for example that of June 1 1994 that stipulated that "the average wage shall increase by 50%". While regulated prices remain in force for a number of domestically produced goods, there are no incentives for even loss-making enterprises to minimize labor costs, since the Government extends bank credits to enterprises that cannot afford to pay the mandated increases, at heavily subsidized rates of interest. There are some signs that Uzbekistan is m,ving towards a stronger link between individual wages and productivity and general conditions in the labor market.' Although such a link is desirable in principle, the recent wage regulation provides for a very centralized system of wage setting which is undesirable in a market economy. While at times of rapid inflation wage indexation is unavoidable to protect real incomes, relative wages should be allowed to adjust and layoffs should take place as necessary. 8. Legislative reforms since independence have ended the commitment to full employment at all costs. The passage of the Employment Law in 1992 allowed the possibility of open unemployment. This should help to address problems of overstaffing, and the rate of unemployment would be expected to rise significantly in the short to medium term. To date, however, pressures on the labor market to adjust to declining output have resulted in real wage falls, rather than open unemployment. In 1992, average real wages were halved and the real minimum wage fell by 74%, but they held up relatively better in 1993, when real wages fell by a further 10%. By late 1993, the number of unemployed had risen slowly to 42,878, representing about 0.5% of the workforce. 9. Restructuring of state-owned enterprises has to date proceeded gradually, partly due to the desire of the government to maintain employment and social stability. However, this could accelerate rapidly with the August 1994 cessation of bank credits to enterprises for wage payments. Privatization in the productive sectors has taken place exclusively in small and medium sized enterprises, with large enterprises in the oil, gas and petrochemical sectors remaining in government hands. Serious Poverty 10. Uzbekistan was, and continues to be, one of the poorer countries in the FSU.2 Using the previous unofficial Soviet poverty line of 75 rubles per person per month, around 44% of the Uzbek population lived in poverty in 1989, accounting for more than a quarter of all poor 3/ In August 1994, a Cabinet of Ministers decree limited real wage increases for non-budget entities to 0.7% for every 1% increase in output. Increases above this level are taxed at 100%. 2/ A central problem in analysis here, as in most former Soviet republics, is that the major sources of information - the Soviet Family Budget Surveys (FBS) - have serious design flaws. . .  households in the FSU.3 Despite the incidence of poverty in Uzbekistan and other FSU republics, it was only in the late 1980s that these problems were officially acknowledged by the Soviet Union. 11. Uzbekistan's pre-transition poverty profile reflected striking variations in the incidence of income poverty among different types of households. In collective farm households, 57 % of people had incomes of less than 75 rubles a month, while in worker/employee households, less than 40% of individuals fell below that level.4 Yet despite the poorer income indicators, the average calorie and protein intake for collective households was higher for every income level.5 These inconsistencies indicate that private plot consumption - as would be expected - is more significant in rural areas. 12. During the period of transition and adjustment, poverty is expected to worsen, before longer term improvements for the majority of the population follow as economic growth resumes. High inflation, at monthly rates of up to 30%, has adversely affected the poor, especially families which depend on cash benefits that have not been regularly indexed. Enterprise and collective farm restructuring is likely to displace large numbers of workers. While liberalization of agricultural producer prices should raise the incomes of net producers, those with limited access to land, capital, and other inputs - in either urban or rural areas - will experience greater relative and absolute poverty. 13. Recent official data suggests that 80-90% of the poor are families with children. With steady high levels of fertility, there is no reason to expect a rapid change in the situation. In terms of identifying vulnerable groups in the transition, there is a need also to track the progress of youth who are seeking their first job entering the labor force in large numbers, and are especially affected by tighter labor markets. The challenges facing Uzbekistan 14. The consequences of the fast rate of population growth. This challenge will continue to face Uzbekistan - whatever the pace and success of macroeconomic reforms. Currently the total fertility rate is 3.8, with a population growth rate averaging to 2.25 % per annum over the last decade and is unlikely to decrease in the short to medium term. The percentage of people 15 years of age and under is unusually high relative to the rest of the FSU at 44%. 15. Rapid population growth has important implications for the level and focus of government expenditures on social protection. On the positive side, a young labor force is more flexible in terms of type and location of employment. The skills needed in a market economy can be taught 3/ Atkinson and Micklewright (1992) 4/ Given the greater average size of collective households, the failure to account for economies of scale in consumption may also explain their higher incidence of poverty. 5/ Marnie and Micklewright, 1993 . .  through the regular and vocational school curricula. Further, there should not be the problems typically encountered in industrial countries and northern parts of the FSU associated with rapidly increasing pension and health costs of an aging population. Overall, however, the negative pressures created by rapid population growth, in particular, in the labor market, and on social services, outweigh the positive aspects. 16. Severe Fiscal constraints. Over the two decades prior to independence, Uzbekistan's economy was not buoyant. In addition, various shocks in 1991--including the cessation of transfers and the collapse of the inter-republic trade system--tightened the fiscal constraints on the Government at independence. The fiscal position has deteriorated significantly and reform of the subsidy and transfer system has become central to successful stabilization.6 This means that, inter alia, the system of social protection during the transition will have to target the poor more effectively, given the unsustainability of universal benefits and subsidies. Uzbekistan: Expenditure Trends in Social Protection % GDP 1H 16 15 14 12 11.4 lo 9.7 ~~~~~~~~~~~10.2 8r~~~~~~~~~~.r 6 ~~~~~~~~~~~~~~~~~~~~5 4 2~~~~~~~~~ 1991 1992 1993 Pensions Family & child allowance :.Ti Sick pay and maternity benefits - . consumer subsidies Figure 1 17. In the short to medium term, total government expenditure will need to be cut. At the same time, ensuring that nobody falls below a minimum subsistence level should remain a high priority for the Government. It is the tension between fiscal and social protection goals that characterizes the issues considered below. While some of the problems can be solved through more appropriate resource allocation, there will also be fewer resources in total. High 6/ More detailed analysis of the fiscal system in general can be found in World Bank (1992 and 1993) and IMF reports. iv  unemployment and increasing incidence of poverty will combine with the pressures on the social system created by rapid population growth. 18. Avenues for reducing fiscal pressures created by social protection are set out below (paragraphs 27-44). Expansion of the payroll tax base and improved efficiency in collection are recommended. In seeking to increase tax revenues however, the tension between revenue goals and the negative efficiency and incentive effects of high tax rates should be recognized. Overly high tax rates also create serious problems of evasion. Revenue could also be increased by simplification and rationalization of the system of tax exemptions. In the long term, greater private sector participation in social insurance may lessen the fiscal demands of pensions, sick pay and unemployment benefits. 19. Worsening Poverty. Existing poverty is likely to worsen with the rise in unemployment that will accompany reforms in the state enterprise sector and stabilization of the economy. The level of frictional unemployment will be significantly higher in a market economy and high structural unemployment is likely to be associated with the adjustment. Eastern and Central European experience suggests that unemployment rates of well over 10% are not unusual during transition. Preliminary projections for open unemployment--though heavily dependent on assumptions about economic growth and the pace of enterprise restructuring7_-suggest that the open unemployment rate could rise significantly following the implementation of economic reforms, up to 6% by the end of the first year. By the end of the third year of reform, unemployment could be expected to be as high as 14%. 20. The problem of unemployment will raise regional, gender, age, and skill issues which have to be addressed. The average duration of unemployment is likely to become a concern, with significant social and economic costs. The risks of long term unemployment are particularly acute amongst youth who do not have previous work experience. The impact of transition is likely to be felt more acutely by women. Unemployment figures for 1992 showed that 62% of the unemployed are women, and up to 96% in some regions, such as Samarkand. 21. Unsustainable levels of Social Expenditure. After independence, the proportion of government expenditure devoted to the social sectors declined, from 31% of GDP in 1991 to about 24% in 1992 while GDP itself shrank by 10%. However, the reduction was achieved almost entirely by cuts in the real value of family allowances with the onset of high inflation. The Government has indicated a desire to move forward with reforms to the coverage of consumer subsidies, and implementation began earnest in early 1994. Yet public spending on pensions continues to rise, doubling as a proportion of GDP since 1991. 22. The major fiscal concerns in the sphere of social protection were the levels of spending on consumer subsidies and pensions. Limited progress was made with respect to subsidies in 1993---for example, the elimination of most direct food subsidies--with expenditure reduced to 8.9% of GDP. A large part of the continuing costs of subsidies was due to the failure to target 7/ Assuming also that the elasticity of employment to GDP is the average experienced in Central and Eastem Europe--i.e. 0.48. v  expenditures, so that rich and poor alike benefit. The Government is considering different methods of targeting, which focus on identifying vulnerable groups and their consumption patterns. During 1994, however, progress on reduction of explicit food subsidies was substantial. By April 1994 remaining budget subsidies on all foods except bread and flour had been removed, although some price controls remained. In June and August 1994, further price liberalization of bread, flour and other non-food items occurred, though substantial implicit subsidies remained. The major source of concern is now pensions, which have continued to rise as a proportion of GDP in 1993, leading to large budget transfers and credits being made to the PF. 23. Financing. Social protection expenditure in Uzbekistan is funded from the budget and extra-budgetary funds financed by payroll taxes: the Pension Fund (PF), the Employment Fund (EF) and the Social Insurance Fund (SIF). The Government passed legislation in August 1993, under which the PF and SIF were merged into a single extrabudgetary fund, known as the Social Insurance Fund (SIFN). 24. Total payroll taxes to finance social protection amount to 40% of the payroll. Payroll taxes currently finance the amalgamated Social Insurance Fund (32.5 %), and a 2 % payroll tax finances unemployment benefits through the Employment Fund. While these funds are technically separate from the central budget, they are supplemented by allocations from the state budget where necessary. Although in its first two years of operation the PF generated surpluses, in 1993 recurrent deficits were covered largely by budget transfers, a tendency forecast to continue in 1994. Up to 1994, the EF was running significant surpluses, although this will cease once registered unemployment rises to projected levels, particularly given the recent cut in payroll tax rate. A 3.5% payroll contribution is directed to local authorities to finance social protection, including family allowances. The contributions going to the trade union were cut (to 2%) as its social insurance functions were transferred to the SIFN. 25. Comparison of social protection contributions by employers and employees in Uzbekistan with those of other countries reveals first, that the overall contribution rate is high by international standards, though about average for FSU republics; and second, that there may be scope for raising the relative contribution of workers. Options for Making the System of Social Protection More Efficient and Fairer 26. Pensions. Uzbekistan's pension expenditures are large relative to its demographic structure and level of GDP (see figure 2). Pension expenditures rose to 11.3 % of GDP in 1993. The following recommendations would reduce pension expenditures while minimizing possible adverse effects for poor pensioners. * The pension replacement rate should be reduced. Priority should be accorded to maintaining minimum pensions, by using flat rate indexation that would maintain the real value of the lowest benefits. The current practice is to award increases periodically that rachet up the entire benefit structure--e.g. the Decrees of March 1 and June 1,1994 vi  increased all pensions by 50%, thereby benefitting better off pensioners much more than those who have to rely on the minimum pension, and also increasing fiscal costs significantly. The recommended reform is progressive in effect, and administratively simple to implement. The Government made a step in the direction of a flatter pension structure in 1994 by reducing supplements for work history from 1.5% of the individual's average wage for each year to 1 %. * The number of employment categories entitled to early pensions should be drastically Pension Benefits and Population Above the Age of 60 in Selected FSU Countries, reduced, or abolished altogether. 1992 Estimates suggest potential fiscal savings from the latter measure of 19 -GD 18 10-14% of current pension 17 expenditure, or 1-1.5% of GDP. 6 14r * Rules should be introduced to 132 prevent pensioners "double 1 1 10- dipping". A retirement test would 9 result in significant savings--of the 87 F] order of 13% of pension 6 expenditure if the relevant 4 jjjj - individuals chose to work rather 3 than retire. An alternative would 2 be to reduce pension entitlements O-- 0 2 4 6 8 10 12 14 16 18 20 22 24 26 to pensioners who choose to work % of Population --e.g. as in Estonia, where they receive a flat rate benefit equivalent to 38% of the old age Figure 2 pension. Source: World Bank, various 1993 * The normal pension age should be raised, to 65 years for men, and 60 for women. Although such a reform would have to be introduced gradually (as in the USA currently, for example), the eventual savings will be significant. If such a reform had been in effect in 1993, pension expenditures would have been 15-18% lower. * Revenue collection efforts need to be strengthened. Enterprise arrears have grown rapidly, to 11% of total revenue of the SIF in mid 1993, partly because present penalties are low. Penalties should be increased, to a rate slightly above the inflation rate. * All taxes (including payroll contributions) should be accorded the same priority in order of payment by enterprises. vii  27. Support for the Unemployed. The Government has established a system of temporary income support for people displaced during enterprise restructuring. However, to date, a large part of the earmarked payroll contribution has been directed to purposes inconsistent with the shift to a market economy: enterprise loans to support "job creation" are the clearest example. Moreover the structure of unemployment benefits is overly complex and administratively demanding. The focus of the Employment Service, and the priority use of the Employment Fund, should be to support the unemployed through the timely delivery of unemployment benefits. Accordingly, the following recommendations are made: * The structure of unemployment benefits should be rationalized into fewer categories in the short term, so that a flat rate benefit is paid with add-ons for each dependent. * Eligibility for benefits should be tightened to exclude voluntary quits. * The Employment Service should revise its role in job creation. It should discontinue the practice of advancing loans to enterprises to finance existing jobs. The guarantee of a job for unemployed people at the end of training should be ended. * Legislation should allow the development of private (commercial and non-profit) provision of employment services and related activities. Temporary employment schemes (public works) could be contracted out where appropriate. The role of the Employment Service in job placement may be important, but here - as elsewhere in the economy - the public sector should not have a monopoly. 28. A well-functioning ES, while an important part of facilitating job placement, cannot by itself increase the number of employment opportunities. A more productive and efficient economy is the key to generating sufficient jobs to absorb both those who lose their previous jobs during the transition, and new entrants. In industrial economies, employment services act as facilitators, helping to notify job vacancies as they arise, financing training in the skills demanded in the labor market, and initiating temporary employment schemes where appropriate. It is important that the Government discontinue centralized wage mandates, and continue to relax constraints to labor mobility--in this sense the recent acceleration of the housing privatization program is welcome, although restraints on resale should be removed. There should be a shift away from existing "continuous length of service" provisions that attach to certain cash benefits (e.g. sick pay) and enterprise allocation of non-wage benefits. Elimination of the propiska system is recommended, consistent with the needs of the emerging labor market. 29. Reducing Universal Subsidies and Increasing Targeted Social Assistance. The Government has recently reaffirmed its intention to reduce subsidies on consumer goods and services. The bulk of food subsidies have been removed, though prices on bread, flour, meat and milk remained below border prices as of August 1994. Moreover, the effects of price liberalization were cushioned by a Presidential decree in August 1994 granting monthly cash compensation (equal to the minimum wage at the time) to virtually the entire working age population. Further recommendations are as follows: viii  * The cost of implicit subsidies (e.g. due to pricing and exchange rate policies) should be calculated by the Government and included in assessing the overall costs of consumer subsidies. * Increase cost recovery for housing maintenance, utilities and public transportation. Schemes need to be developed that would compensate poor households against severely adverse effects, such as life line tariffs, and/or cash social assistance to low income families. 30. Family Allowances. As universal subsidies are eliminated in accordance with the timetable announced by the government, measures of social assistance to protect the poor against serious declines in consumption need to be introduced. Uzbekistan inherited an extensive and complicated system of family allowances, that is nonetheless the best targeted instrument readily available. However, real benefits had been allowed to fall to very low levels, largely due to non-indexation. Reforms in the second half of 1994 have rationalized the schedule of allowances significantly. 31. Although the vast majority of poor households have children, two-thirds of families with children are not poor. Government ministries are developing mechanisms to target family allowances further, through means-testing and other criteria, that could be introduced in the medium term. Given the currently compressed income distribution, means-testing will often be difficult, as large numbers of the near-poor are close to the poverty line. Nevertheless, the Government can minimize the extent of unintended leakage through designing programs which are as simple and flexible as possible. Given practical problems and administrative costs associated with means-testing, it is advisable that categorical criteria be used to supplement income tested targeting. In the short term, the following measures should be taken with respect to family allowances: * Decide on the role that family allowances are expected to play in the Government's overall poverty reduction strategy. If they are retained, benefit levels should be indexed to past movements in the consumer price index, rather than the minimum wage. * Consideration should be given to the introduction of categorical criteria in the short term (e.g. ownership of certain durable assets) to supplement and reinforce the planned introduction of incomes testing, administered locally, that would confine receipt of allowances to poor families. 32. Recent Social Assistance Reforms. Recent measures have moved both towards and away from a better targeted system of social protection. From October 1994, the Government instituted a pilot scheme for targeted social assistance, predominantly to low income families. Local communities through the makhallah, assess those eligible for assistance from a fund supported by the Republican and local budgets. The budgetary allocation--at one percent of GDP--is significant. This system appears to be progressive in terms of introducing targeted assistance, and relatively simple to administer. In contrast to this measure was the introduction ix  in August 1994 of monthly compensation payments (equivalent to the minimum wage at the time) to virtually the entire working age population. These were intended to offset the effects of continuing price liberalization. This measure while preferable to the proportionate indexation of wages and benefits that had been the previous practice, still could have been better targeted to the poor. 33. An additional drawback of the recent measures is that the system has moved away from the desirable objective of having a single social assistance benefit. A single benefit would be desirable for several reasons: (i) it would reduce the overlap between different social assistance benefits that exists currently, eliminating problems of double dipping; (ii) it would allow consistent targeting criteria to be applied in determining social assistance benefits; and (iii) it would streamline administration of social assistance benefits, and allow more coherent development of benefit policy. It is recommended that the Government allow the monthly compensation to be eroded in real terns, through non-indexation of the payment. The priority should be to develop the new local social assistance scheme, in particular by monitoring the distribution and impact of the assistance. 34. Privileges. There are assorted benefits and services available to groups that has been traditionally considered to be disadvantaged, including single elderly and disabled people. The amounts of budgetary expenditure are low, and although entitlement is not means-tested, the benefits appear to be relatively well targeted. Programs providing breakfast for schoolchildren and nutritional supplements for pregnant women and infants are also justified. In the short term, the various privileges can play a useful role in cushioning the impact of the transition on disadvantaged groups. In the medium term, re-evaluation is recommended with a view to shifting to cash rather than in-kind support. 35. Maternity Benefits. High rates of female labor force participation has been encouraged through a series of leaves and concessions available to working mothers. But, there is a real risk that such benefits may become obstacles to women's employment opportunities in profit- oriented enterprises. The following reforms should be considered: * Reduction of the replacement rate of the maternity benefit from 100% of the mother's wage. Rates of 50-85% of previous real earnings are typical in industrial countries. * Reduction of the length of leave entitlement--currently two years after birth. 36. Sanatoria and other expenditures of the trade union (former SIF). Absenteeism, and hence costs of sick pay, are not a significant problem in Uzbekistan. However, the cost of financing the sanatoria and health resorts - traditionally provided by the official trade union through the SIF - has escalated in recent years. It is recommended that such services be privatized, or be run on a cost recovery basis. In this light, it appears that the new level of payroll tax--2%--that will continue to accrue to the official trade union is too high and should be reviewed as soon as possible. x  Improving quality and efficiency in the health care system 37. The health status of the people of Uzbekistan is similar in many ways to that of other middle income countries. It has moderate levels of child and adult mortality, with a mixed epidemiological profile reflecting infectious and non-communicable diseases. However, health indicators could be expected to be better, given the level of per capita health expenditure and widespread availability of human and material health resources. 38. Health status shows significant regional variations. Generally, rural areas have higher mortality rates and incidence of disease, due partly to lack of sanitation, unsafe drinking water, lower average incomes and lower educational attainment. Infant mortality rates nationally were 38.7 per thousand live births in 1992, while those in the Aral Sea area reached 61 per thousand (correcting MOH figures for a 21 % underestimation caused by differences between Soviet and WHO definitions of live births). Maternal mortality is high at 42.5 per 100,000 live births, and exhibits regional variation (up to 141 per 100,000 for Tashkent City). The types of disease prevalent vary by region also, with rural people typically suffering from acute infectious diseases such as diarrhoea and respiratory infection, and urban populations from chronic lifestyle-related illnesses such as heart and cerebrovascular conditions. 39. The main problems in the health care system are low quality and efficiency, in terms of personnel, equipment and infrastructure. The Government has recognized and is seeking to address many of the current drawbacks, evidenced by the drafting of its first Health Law, to be approved in 1994. The challenge is to maintain an adequate system of health care at a time of severe fiscal constraint by increasing the efficiency with which inputs are used. 40. The people of Uzbekistan have regarded a comprehensive system of health care as a right. While basic health services should remain freely available to all, reforms are needed to introduce cost recovery and/or private provision for higher levels of service. 41. Health care needs. It is recommended that reforms to improve the efficiency and equity of the health care system address the following: * quality improvements to a few critical clinical services (prenatal and delivery care, family planning, treatment of acute respiratory infections and pneumonia, TB, hypertension and diabetes control). * increased spending on key public health programs accompanied by complementary pricing and taxation policies, including improving the quality of water, health education to reduce cardiovascular and other diseases, increased programs of family planning education and availability, and tobacco and alcohol consumption control programs). * improvements to the quality of medical training, through greater focus on preventative care, and assessment of personnel needs for doctors and lower level medical staff. xi  42. Financing and management. In 1993, Uzbekistan spent about 4.7% of GDP on health, which was high relative to an FSU average of around 3% of GDP.8 Allocations to the oblast and raion level were based on the number of hospital beds and a notional cost per hospital patient. This continued Soviet patterns of health care, which encouraged high ratios of hospital beds and doctors to patients, with efficiency and regional patterns of disease ignored. The result was high rates of hospitalization, with long average inpatient stays. 43. Since 1992, the system has been financed under "emergency" budgets at the Republic level, while there has been a rapid devolution of health care financing from the central government to raion and oblast authorities. Previous methods of determining regional budgetary allocations have been maintained, giving limited efficiency incentives. High inflation has adversely affected the health care system, given sharply rising salary costs, increasing from 41 % of total costs in 1991 to 48% in 1993 (Q1-3) squeezing other essential expenditures. There have been dramatic increases in the price of imported inputs such as drugs, vaccines and medical equipment. 44. The Government has responded with preparation of a new health insurance program. The proposal combines both public (financed from payroll contributions) and private (quasi-public and heavily regulated) elements. If this approach is to ease the crisis, there will need to be an assessment of what enterprises can afford to pay, the appropriate rate of individual contributions and co-payments, the method of revenue sharing between central and local authorities, as well as the relationship between health provision and financing. 45. There has been privatization of a range of health facilities and related institutions, and establishment of fee-charging private clinics, medical practices and pharmacies. There have been limited moves to local production of medical supplies. A new parastatal - Uzpharprom - is to engage in joint ventures in production and research with foreign companies. More generally, there have been attempts to reduce inpatient beds and the intake of medical students, shifting care toward day care and polyclinics staffed by lower level staff. 46. It is recommended that: * the Government continue to promote methods for diversification of health care financing, including private provision and financing of services; * the health financing responsibilities of central and local authorities be clarified, and revenue raising powers be devolved as appropriate, including revenue sharing of any future compulsory health payroll levy; * budgetary allocations from central to local authorities be based on per capita indicators, rather than numbers of hospital beds. More sophisticated formula, related to indicators of need, such as income per capita or health status, should be developed over time. 8/ Estimate based on MOH budget figures, and estimate of total GDP in World Bank, Uzbekistan: Suibsidies and Transfers (1994). xii  Meeting the Challenges 47. The people of Uzbekistan are facing huge economic and social challenges. The reduction and reorientation of existing public expenditures is at the crux of the challenge of adjusting social protection in Uzbekistan. The Government has expressed its willingness to move forward in reform; timely implementation is now critical. 48. Reallocations of social protection expenditure should take place in order to focus on the most vulnerable (see Figure 3). This will require rapid adoption of targeting mechanisms for delivery of social assistance. The use of nearly universal compensation payments is unlikely to be sustainable. Benefit levels should be set to protect a minimum subsistence level for the poor. This would include expanding income support for the unemployed. Changes to pension rules and benefit levels would reduce high current expenditures to levels that are more consistent with Uzbekistan's age structure and national income. 49. The policy reforms in the sphere of social protection, as more generally in the economic program, are mutually reinforcing. Reductions in universal subsidies should be accompanied by increased levels of well-targeted benefits. As overall social expenditures are cut, fiscal pressures will correspondingly be reduced, thereby helping to stabilize prices and output. Without macroeconomic stabilization it will be difficult for individuals to provide social protection for their families, and virtually impossible for the Government to provide a sustainable safety net. Social Expenditure in Uzbekistan Past, Present and Future (% of GDP) Pensions Subsidies .. Unemployment ben. & Family allowances S ck pay & maternity active lab market measures benef Its %o GODP 35 31.1 30 25 21 92 20 17 15 1 - 1991 1993 1996-7(with reforms) Figure 3 Notes: 1996-7 projection withi implemllentation of recomnimended reforms Tlealth and Education expenditures are not included. xi.ii   CHAPTER 1 THE MACROECONOMY AND HUMAN DEVELOPMENT 1.1 In Uzbekistan, the weaknesses of the command economy became increasingly apparent in the 1980s. This strained the government's ability to maintain the previous level of welfare and service provision. Since 1991, the transition and large macroeconomic shocks have led - as in other former Soviet republics - to a deterioration in broad economic indicators. This chapter briefly outlines the economic conditions inherited by Uzbekistan at independence, and recent developments in the country, providing the context within which decisions on social sector policies are taking place. It goes on to highlight human development indicators and trends, before discussing trends in poverty. The Inheritance 1.2 Uzbekistan's economy had been deteriorating for a number of years prior to independence, due to long term under-investment and declining productivity. Productivity growth was actually negative for the period 1970-90 (see Table 1.1). During the Soviet period there were large transfers from the Union budget, which grew from 7% of Uzbekistan's GDP in 1987 to 19.5 % in 1991. The transfers meant that local resources were able to be substantially devoted to the social sectors, broadly defined. The pattern of government expenditure that resulted from the level of inter-Republic transfers is a significant legacy in the social sectors. 1.3 The economy of Uzbekistan depends primarily on agriculture. The agriculture sector represented 35 % of GDP in 1992, with cotton production accounting for about 40 % of the gross value of agricultural production. Uzbekistan was the largest producer of fruit and vegetables in the FSU. Agriculture and forestry accounted for around 43% of employment in 1992, up from around 39% in 1990. The long term poor performance of agriculture in Uzbekistan, as in most of the FSU, was poor. However, the country remained heavily dependent on food imports from Russia and Ukraine, particularly grain. Production is still dominated by collective and state farms, many of which are overstaffed, though the share of private production continues to grow. 1.4 The industrial sector accounted for around one third of net material product, consisting largely of processing of agricultural raw materials and the production of machinery and chemicals linked to agriculture. The quota and state orders systems hampered the emergence of relative prices that would promote efficiency. 1.5 The objectives of enterprises under the Soviet system focussed on output - rather than profit - maximization. This reflected large state subsidies and resulted, inter alia, in labor hoarding. Concern with efficiency was undermined by the administrative and financial demands of the enterprises' social welfare function. Workers and their families were provided with many in-kind benefits and services through their employer such as child care, health care, and housing, with larger firms generally offering more comprehensive packages. The trade union played a  major part in implementing this system. Access through the workplace to many services, provided incentives to work and job stability, but - by providing the same services to all workers - further weakened the link between earnings and individual productivity and discouraged labor mobility.' 1.6 Uzbekistan was among the poorer of the republics of the FSU (see Total factor productivity growth rates by selected republics and sectors, table 1.2).lo Nonetheless, 1970-1990 the Uzbek people enjoyed Total Indusry Agriculture Construction a sense of security in the Total_Industry_Agriculture_Construction Soviet era, through the Uzbekistan -0.4 0.5 -3.7 -0.6 guarantee of state USSR 0.8 1.1 -4.1 0.5 employment and the Russia 0.8 0.9 -5.3 0.5 Kazakhstan -1.1 -1.5 -6.4 -0.3 provision of various social Tajikistan -0.4 -0.3 -2.9 -1.1 benefits through the Georgia 2.3 2.6 0.1 0.3 enterprise. There were Turkmenistan -2.0 -3.0 4.0 -2.1 Kyrgyzstan 0.2 1. I -3 .9 @~~~~~-.2 some categorical programs Kyrgyzstan 0.2 1.1 -3.9 for the disadvantaged. Source: Easterly and Fischer (1993) Services for the disabled such as training schools and boarding homes, assistance in the home for single people unable to work, and sanatoria for war veterans and the elderly, were the main focus of social assistance. At the same time, the Soviet system was notable for its limited assistance to those who had never worked and to those temporarily unable to work e.g. social pensions - paid to those with insufficient work history - were much smaller than labor pensions. There were significant gaps in the support provided by Soviet welfare programs. In theory, price controls on basic consumer goods ensured affordability, although shortages were pervasive, indexation of benefits occurred seldomly and the amount of "hidden inflation" was substantial. Developments Since Independence 1.7 Perhaps the most significant change in the financial position of Uzbekistan at independence was the loss of Union transfers which had amounted to one fifth of GDP in 1991. This was combined with a collapse in inter-republic trade and deterioration in the terms of trade shock. These various shocks contributed to a fiscal deficit in 1991 of around 5% of GDP. 9t At the same time, a recent study suggests that the scale of enterprise provision in Uzbekistan was significantly less than in Russia, for example, which attributed largely to the rural and agricultural base of the economy, and larger importance of private housing (see Newell 1994). Studies of Russian enterprises indicate that non-wage benefits to workers comprised approximately 35% of total labor compensation. Wages accounted for around 50% of total income, or 65% once bonuses were included. See Commander and Jackman, 1993. 10/ See Box 1. I for a discussion of Soviet data sources on poverty. 2  1.8 The Government has followed a more gradual and partial approach to economic reform than its neighbors. Nevertheless, Uzbekistan experienced a deterioration in macroeconomic conditions in the face of several adverse external developments and worsening macroeconomic imbalance. Real output declined by about 13% between 1991 and 1993 and is projected to fall by at least 7% in 1994. " 1.9 Inflation has become a serious problem. Consumer prices S Table 1.2 Shares of Soviet Population with Per Capita Income rose by an estimated 1100% in Below 75 Rubles Per Month in 1989, and Percentage of Selected 1993. Initial price rises were Republics' Populations Below 75 Rubles in 1989 inevitable with liberalization Share of total USSR % of population measures, but tighter monetary population below R75 below R75 and fiscal policies are needed to control continuing inflation. Russia 23.3 5.0 When price liberalization of 1992 Ukraine 9.8 6.0 was subsequently reversed with Georgia 2.2 13.0 regard to 12 basic commodities, Kazakhstan 8.1 15.5 Kirghizia 4.5 32.9 the proportion of government Turkmenia 3.9 35.0 expenditure devoted to subsidies Tadzhikistan 8.4 51.2 rose sharply from 17% of total Source: Atkinson and Micklewright (1992) budgetary expenditure in 1991 to Note: A uniform Soviet-side poverty line is used. 26% in 1992. Family allowances, which were relatively well-targeted on the poor, were cut drastically in real terms partly in order to allow these increases in consumer subsidies. 1.10 The government has been running unsustainable fiscal policies. In 1993 the overall deficit on the Government's financial operations - taking into account extra-budgetary funds, foreign currency transactions, and net lending - is estimated to be 15.4% of GDP. Direct subsidies and transfers to enterprises likely accounted for more than half the total deficit. There are directed credits to enterprises who cannot afford to pay mandated wage increases. Directed credits carry interest rates that, given current inflation, effectively entail capital grants. However, wage regulation reforms in August 1994 introduced tighter monitoring of bank credits to enterprises for wage payments. 1.11 The fall in output appears to represent lower capacity utilization and the collapse of inter-republic trade, rather than economic restructuring. That the output decline was less than in other former Soviet republics is thus not evidence of successful transformation, but rather of the slow pace of enterprise restructuring and labor market reforms. I1/ Output fell by 13% in the first quarter of 1994, compared to the same period in 1993. 3  1.12 Restructuring of state-owned enterprises has to date proceeded gradually, partly due to the desire of the government to maintain employment and social stability. The state sector (including collective farms) still accounts for about 80% of all employment, and 85% of GDP, though there has been an expansion in private enterprise employment since independence. Open unemployment was only 0.5% in September 1993. 1.13 The fiscal constraints imposed by the Table 1.3 macroeconomic situation Federal Revenue and Expenditures imply that the system of social protection during the transition will have to 1991 1992 1993 target the poor more Total Revenue as % GDP 45.5 34.2 41.0 effectively, given the of which, share to current revenue unsustainability of VAT or sales tax 36 27 26.3 universal transfers. The Excise - 25 2.5 Export tax"' ~~~~- 6 4.2 Government's economic Enterprise income tax 5.7 17 21.1 reform agenda for 1994 Personal Income tax 2.6 8 8 expressly recognizes the Union grants (net) 19.5 - need to target social assistance to those most in Total Expenditures 50.6 45.2 43.4 need as a way of reducing of which, share to current expenditure: National economy 53 41 34 public expenditure. In Social and cultural programs"' 35 37 39.6 addition to ongoing development of the poverty Deficit Narrow ruble 5.0 10 2.5 line and means testing Consolidateddl 15.4 methods, a pilot scheme of targeted benefits to low Source: Ministry of Finance, Bank and Fund staff estimates income families was Note: Off budget revenues and expenditures excluded introduced in the fourth Export taxes refer to raw material taxes on inter-republic trade only. quarter of 1994, which National economy includes subsidies and state capital investment. relies. on Expenditures financed by the PF are excluded. relies on community d' Including the off-budget funds knowledge of vulnerable families rather than a formal means test. The identifying characteristics of the poor in Uzbekistan are described below. 4  Human Development Indicators and Trends 1.14 The overall human development indicators for Uzbekistan are similar to the other Central Asian republics.'2 This section describes demographic and health trends as well as patterns of poverty and inequality.'3 1.15 Uzbekistan had a population of 21.7 million in 1992, the largest among the Central Asian republics and the third largest in the FSU after Russia and Ukraine. This will continue to grow rapidly. Regional variations in birth rates - ranging from 2 in Tashkent City to 4.5 in Qashqa Darya - are an important feature of the demographic profile. The death rate is 7 per 1000. The population growth rate is over 2.5% annually. Table 1.4 presents basic demographic information, and Annex 5 sets out more detailed demographic projections. 1.16 There is an unusually high proportion of young people, with those 15 years of age and under comprising around 44% of the population. In addition, around 8% are of pensionable age, giving a high dependency ratio of 0.85. The population is predominantly rural, with 61% of people residing outside the cities. 1.17 Life expectancy nationally is 72 years for women and 66 for men, similar to other former Soviet countries. However health status shows significant regional variations. Generally, rural areas have higher mortality rates and incidence of disease, due partly to lack of sanitation, unsafe drinking water, lower average incomes and lower educational attainment. Infant mortality rates nationally were 38.7 per thousand live births in 1993, while those in the Aral Sea area reached 51 per thousand (45 and 61 per thousand respectively, when a 21 % underestimation in official figures is corrected for). Maternal mortality is high at 42.5 per 100,000 live births, and exhibits regional variation, up to 141 per 100,000 for Tashkent City. The types of prevalent disease vary by region also, with rural people typically suffering from acute infectious diseases such as diarrhoea and respiratory infection and urban populations from chronic lifestyle-related illnesses such as heart and cerebrovascular conditions. 1.18 Although their labor force participation rate is high, women in Uzbekistan have an average of four children, with 200,000 women having ten or more. The health profile of women is negatively affected by the frequency of births, with 70% of pregnant women and 25 % of all women being anemic. About 65% of women do not use contraception, though this situation is improving, and the Government target is 70% coverage by 1997. 1.19 The health of children is related both to mothers' health and education and family size. There is no systematic monitoring of children's nutritional status. The vaccination program 12/ There remain difficulties in interpreting figures based on Soviet definitions for the purposes of international comparison. 13/ Chapter 7 addresses health status in greater detail. 5  achieves more than 80% coverage, though there are emerging problems with both access to vaccines and cold storage facilities. 1.20 Literacy is nearly universal in Uzbekistan, with highly qualified teaching staff and wide coverage. However there is evidence that facilities are deteriorating, and in need of a significant program of capital expenditure and maintenance. At independence, the Government inherited curricula that reflected the economic and political demands of the Soviet tUnion. 1.21 An important continuing function of the education system is the provision of free and partly subsidized meals to all students in schools and universities. Since independence, the ability of the system to provide hot meals to all students has been under-mined, both through the inadequacy of facilities, and more limited budgetary allocations. Patterns of Poverty and Inequality 1.22 In 1989, using the then unofficial Soviet [able 1.4 poverty line of 75 rubles per person per month, gp Protl IJobekistan 1993 Uzbekistan had around 44% of the population P'pu(ltion living in poverty, accounting for more than a (mlillions) 21.7 Percent tentiale 50.() quarter of all poor households in the former Percent urbani 39.) Soviet Union (see table 1.2 above). It was second only to Tajikistan in the percentage of lUzbe, kroups (%) 71.0 people within the republic that fell below the Russian 8.0 poverty line. However, it was only in the late Otlher 21.0 1980s that poverty questions were officially Population BY Age acknowledged by the Soviet Union. (years) 0-14 years old 41% 1.23 Given certain provisos about the Family Older than 59 xC Budget Survey (FBS) data and methodology (see Lite Expectancy at birth 68.3 Box 1.1), general patterns of poverty are evident. A significant finding is the varying incidence of Infant mortality rate 38.7/1000 poverty among different types of households. Maternal mortality rate The household types to be distinguished are (per 100,000 live birthls) 42.5 worker households (employed in enterprises), and collective households (working on collective and Source: Miniistry ot hlealtli. state farms). In 1989, in collective households, (1) Figure adjusted tor Soviet detinitions of live state farms). In 1989, in ~~~~~~~~~~~~birthi 57% of people had incomes of less than 75 rubles a month, while in worker/employee households, only 39% of individuals fell below that level. Another difference was household size: rural households tend to be significantly larger, the median collective household having 7 members, while the median for worker/employee households was only 4 members. The simultaneity between household size and sector makes it difficult to establish clear causal links of poverty. 6  1.24 Yet despite the better income indicators for worker/employee households, the average calorie and protein intake for collective households was higher for every income level.14 These inconsistencies indicate that private plot subsistence consumption - as would be expected - is more significant in collective households, and that the FBS money income measures understate the welfare of this group. Given the greater average size of collective households, the failure to account for economies of scale in consumption may also explain their higher incidence of poverty. A further partial explanation could relate to the higher prices of goods in urban areas, reducing the calories and protein that can be purchased for the same price. 1.25 Identifying the relative poverty of different groups gives some indication of the extent of child poverty in the country and the potential role for family allowances and the school system in targeting assistance. Data from the MOL suggests that, of the 25% of the population who fall below the redefined national poverty line, 80-90% are families with children. There is no reason to expect a rapid change in the situation. School leavers are also likely to be a vulnerable group in the transition, since the impact of tighter labor markets affects those seeking their first jobs disproportionately. 1.26 A further feature of poverty and Table 1.5 inequality under the Soviet system was the Gini Coefficients and Decile Ratios for Selected over-representation of women among low Republics and Countries (1989 unless indicated) income earners. This is discussed further in Gini Decile ratio Chapters 2 and 3. Uzbekistan 29.8 3.68 Pressures on Social Expenditure USSR 28.9 3.53 Russia 27.8 3.16 1.27 Social protection expenditure in Ukaaine 23.5 2.76 Uzbekistan has been funded from the budget Poland 26.8 3.31 and extra-budgetary funds, the Pension Fund Hungary 24.4 2.81 (PF), the Employment Fund (EF) and the UK(1985) 29.7 3.79 Social Insurance Fund (SIF). The us 40.0 10.40 Government passed legislation in August 1993 under which the PF and SIF have been Source: Atkinson and Micklewright (1992) merged into a single extrabudgetary fund, known as the Social Insurance Fund (SIFN). In principle, several types of social protection expenditure are met entirely from taxes paid by enterprises, amounting to 40% of the payroll, which are used to finance a series of extrabudgetary funds. Payroll taxes finance the SIFN (32.5% of the payroll). The 1992 Law on Employment of the Population introduced a 3% payroll tax to finance unemployment benefits through the EF which was reduced to 2% in January 1994. While these funds are technically separate, they are supplemented by allocations from the state budget where necessary. Following the loss of social insurance functions, the official trade union still receives a payroll tax of 2 %. 14/ Marnie and Micklewright, 1993 7  1.28 Figure 1. 1 shows recent trends in social expenditure. In contrast to 1991 when only about one-fifth of social protection spending was devoted to subsidies, in 1992 the proportion was increased to 43 % (i.e. 10% out of 24%). The proportion of total spending on pensions also rose (from 8.4% in 1991 to 11.4% of GNP in 1993), while the share of sickness and maternity benefits remained at about 2 percent. There was a dramatic reduction in spending on the family allowances, which fell from 15% of GNP to only less than 0.5% of GNP in 1993. " This was mostly due to the impact of rapid inflation, and failure to index family allowances. Box 1.1 - Methodological Issues in Soviet Data on Living Standards Analysis of the methodological problems of Soviet Family Budget Surveys (FBS) has revealed over- and under-estimates of the incidence of poverty, so that predicting the net bias is difficult. The three major issues in assessing the FBS data are sample selection bias, valuation of incomes, and setting of the poverty line. Sample selection bias occurred through the failure to include non-working households, households working in the informal sector, and undersampling of pensioner households. Amongst workers who were sampled, those in large enterprises were over- represented, as well as people in more senior positions. This lead to underestimates of the level of poverty, and a misrepresentative picture of the poor. The survey may not be regionally representative. The total FBS sample is over 4,000 families but the sample size in some oblasts is quite small. Amongst those actually surveyed, problems arose due to undervaluation of income in-kind. The valuation of such income at state official prices, and the neglect of ownproduction that is consumed at home, meant that the incomes of rural households were often higher than estimated in the FBS. The failure to allow for economies of scale in household consumption was a further shortcoming of the FBS. This lead to overstatements of poverty among large households. Details about correcting for this by the use of equivalence scales are outlined in Annex 3. Official Soviet measurement of the poverty line was based on a "social minimum income" designed to buy a 'social", rather than minimum, subsistence basket of goods. The level was about 50% of the national average income, and was thus based more on a relative concept of poverty. This was problematic. The single Union-wide level did not reflect price variations across and within republics Within republics, there are further questions. Did collective households face higher prices than worker/employee households? However, the level was based on a diet that was high in calories and animal fats, and did not accurately reflect the consumption patterns of the poor. There is also evidence that the Soviet basket contained different amounts of meat and eggs than are consumed by Uzbeks. Source: Atkinson and Mlcklewright (1992) 1.29 The major fiscal concerns in the context of social protection have been the levels of spending on consumer subsidies and pensions. The government appears to have recognized that the current system of subsidies is unsustainable. Following official announcements that universal subsidies would be abolished (except those on bread and flour), limited progress was made with respect to subsidies in 1993, with expenditure reduced to 9% of GDP in 1993. Further significant steps were taken in 1994, with prices of bread and flour increased in June, and more than doubled in August 1994. The abolition of direct budget subsidies for bread and flour, was announced, though the retail prices remain administered. 15/ Though by the middle of 1994, this had risen to 1.5%, with reforms to the system of family allowances. 8  Uzbekistan: Expenditure Trends in Social Protection % GDP 18 16 15 14 12 11.4 10.2 1 0 9.7 1. .6~ ~ 655 6.5~~~~~~~~~~~~ 2 1 2 2 2j 1991 1992 1993 Pensions . Family & child allowance LLi Sick pay and maternity benefits Consumer subsidies Figure 1. 1 1.30 The Government is considering different methods of targeting, which focus on identifying vulnerable groups and their consumption patterns. Means tested family allowances, were to be introduced by July 1994 although this measure was deferred. A pilot targeted assistance scheme to low income families introduced in the fourth quarter of 1994 appears to be an interim measure to improve the impact of cash benefits on poverty. How rapidly other transfers are likely to be targeted remains unclear. Compensatory payments intended partly to offset the impact of food price liberalization were introduced in August 1994, but are provided to virtually the entire working age population. These questions are considered in detail in Chapter 4. Pensions have continued to rise as a proportion of GDP in 1993, and are a major source of concern. Options for reducing pension spending in ways that would protect poor elderly are set out in Chapter 5. 9  CHAPTER 2 THE CHALLENGES 2.1 Large challenges face the Govemrnment of Uzbekistan in ensuring an adequate level of social protection for vulnerable groups during the transition. Since December 1993 the Government has issued several significant statements and decrees setting out an economic reform program for 1994 and beyond. In the context of severe fiscal constraints, many factors will combine to necessitate an overhaul of the system inherited from the forner Soviet Union. The reduction in and reorientation of expenditures that the transition and fiscal pressures entails will take place in a context of rising unemployment, increasing inequality, enterprise restructuring, large numbers of youth entering the labor market and differential effects of the transition on various groups. 2.2 In the short to medium term, total public expenditure will need to be cut.'6 However, ensuring that nobody falls below a minimum subsistence level should remain a high priority for the Government. The tension between fiscal and social protection goals characterizes the issues considered below. While some of the problems can be solved through more appropriate resource allocation, there will also be less resources in total. In addition, Uzbekistan has a fast population growth rate, increasing the demand for social services and protection, and making the challenges even more difficult. 2.3 The chapter outlines the demographic and fiscal challenges which provide the context for the need to reform the system of social protection. Rising unemployment, poverty and inequality, enterprise restructuring, the effects of the transition on women and rural-urban disparities are highlighted in turn. Possible approaches and policy reform options are discussed in following chapters. Rapid Population Growth 2.4 Whatever the pace of economic reform Uzbekistan will have to face the consequences of the fast rate of population growth of over 2.5% per annum. Currently the total fertility rate is 3.8. The percentage of people under 15 years of age is unusually high by international standards, and unlikely to decrease in the short to medium term.17 Annex A sets out demographic projections in detail. 2.5 This has important implications for the level and focus of government expenditures on social protection. Negative fiscal effects of fast population growth have to date been partly 16/ See World Bank (1994) Economic Report on Subsidies and Transfers for more detailed analysis. 17/ The Government has begun to address the issue of high fertility. with expanded educational programs of family planning since 1991. 10  avoided by sharp falls in the real level of child allowances. The various proposals to reform this benefit would heighten its poverty alleviation impact, but also increase government expenditure, even with targeted child allowances. 2.6 Rapid population growth has some positive aspects. A young labor force is flexible in terms of type and location of employment. The skills needed in a market economy can be taught through the regular and vocational school curricula. There should not be the problems often encountered in industrial countries with increasing pension and health costs of an aging population. On the other hand, the number of young people creates a high dependency ratio in the short and medium term, as well as demands on the education system and nutritional programs. Youth seeking jobs will exacerbate the transitional difficulties of tight labor markets. Limited job opportunities in the short-term are likely to affect new cohorts of school leavers disproportionately. In 1992, over half the unemployed were under 30 years old. The potential social and economic costs of long term unemployment of youth are substantial. Overall, the disadvantages of rapid population growth appear to outweigh the benefits. Severe Fiscal Constraints 2.7 Reform of the fiscal system is central to macroeconomic stabilization. The overall fiscal deficit--including extra-budgetary funds and net lending--amounted to 15.4% of GDP in 1993. The costs of the transition, combined with the aggregate shocks to the economy, mean that Uzbekistan will be fiscally constrained for the foreseeable future. 2.8 The avenues for reducing fiscal pressures in the context of social protection are on both the revenue and expenditure sides. On the expenditure side, reductions in consumer and producer subsidies, and targeting of benefits on those in need should be the focus of policy makers. In the long term, greater private sector participation in social insurance may lessen the fiscal demands imposed by pensions, sick pay and unemployment benefits. 2.9 On the revenue side, expansion of the tax base and improved efficiency in tax collection would improve the fiscal balance. In seeking to increase tax revenues however, the tension between revenue goals and the negative efficiency and incentive effects of high tax rates should be recognized. Overly high tax rates also create serious problems of evasion and revenue collection. Already the taxable wage bill reported for social insurance taxation is significantly smaller than the total wage bill. Revenue could also be increased by simplification and rationalization of the system of tax exemptions. Improved budgetary management is also needed. However when the economy is depressed and there is a shift toward private ownership in the enterprise sector, forecasts of increased short term revenue effort must be cautious. 2.10 More fundamentally, improved enterprise efficiency and macroeconomic performance will be a powerful tool of social protection, by ensuring employment for an expanding work force, and lowering the level of poverty through rising real wages. Much will depend upon the productivity of the agricultural sector, and especially cotton. Economic growth also increases 11  tax receipts and allows increased expenditures on social protection programs for vulnerable groups. 2.11 Key macroeconomic and f'iscal projections vary significantly according to the assumptions used.'8 This report proceeds on the scenarios set out in the World Bank's 1994 Economic Memorandum. The "gradual retorm" scenario assumes that major stabilization and adjustment measures are implemented by the Government and sustained. Necessary reforms include price and trade liberalization, removal of quantitative restrictions on imports and abolition of the state orders system in agriculture. Ulnder this scenario, GNP decline is expected to accelerate initially but to improve thereaf'ter, so that growth would be positive by 1997. 2.12 By way of contrast, the "muddle through" scenario assumes that reform is only partial and largely ineffectual. UJnder this scenario, near term decline in output would be less, but economic stagnation would be prolonged and lost output ultimately greater than under the reform scenario. In April, 1994 the gradual reform scenario more closely resembled actual developments since the mlajor refOrins required hlad been announced and scheduled for implementation in 1994. Rising Open Unemployment 2.13 A major challenge of the transition will be the rise in unemployment that will accompany stabilization and restructuring." The burden of falling productivity has been borne to date by real wage cuts and large enterprise subsidies, rather than laying off of workers. As enterprises lose state subsidies and adapt to market signals, they will have to reduce overstaffing. Beyond the structural unemployment associated with the adjustment, the level of frictional unemployment also will be significantly higher in a market economy. High population growth will exacerbate an increasingly tight labor market. The pace of recovery and expansion of private sector employment will be largely dependent on the level of economic growth that can be achieved. 2.14 While unemployment forecasts are difficult, the experience of Eastern and Central European countries suggests that unemployment rates exceeding 10% are not unusual during transition. Many former command - as well as industrial market - economies have had to face possibility of mass lay-offs. Such labor retrenchment has not begun to occur in Uzbekistan. During 1993, the number of new registered job seekers averaged less than 0. 1% of the workforce quarterly, with seasonal fluctuations. Lay-offs have been largely confined to the industry and construction sectors, while the number employed in agriculture and other branches of the economy actually grew between 1991 and 1993. 2.15 Bank projections show that the open unemployment rate could be expected to rise significantly as the economic reform program proceeds, depending upon the progress of enterprise restructuring and economic growth. After the first year of enterprise reform, unemployment could rise to up to 3-6%. After three years of reform, unemployment could be as high as 14%. Migration is likely to increase as restrictions on movement are eased and 18/ Both sets of projections also assume a suhstantial reduction in the current rate of inflation, which has not occurred to date. 19/ Chapter 3 explores labor rnarkets in detail. 12  unemployment hits harder in some areas. This will increase demands on the housing stock, infrastructure, and local systems of social protection in localities that are relatively attractive. The fiscal implications of rising unemployment are highlighted in Chapter 3. 2.16 The problem of unemployment will raise regional, gender, age, and skill issues. Long term unemployment carries significant social and economic costs. The risks are particularly acute amongst the young, who do not have previous work experience. Table 2.1 presents a breakdown of the unemployment figures for Uzbekistan in 1992, showing the emerging gender, spatial, and age differentials in unemployment rates. It is already apparent that women and the young are over-represented among the unemployed. Enterprise Restructuring and Divestiture of Social Assets Table 2.1 Unemployment structure by selected 2.17 Enterprise restructuring and privatization, characteristics (% of the unemployed) and its social and economic consequences, Gender: underpin the challenges facing Uzbekistan. - female 62 Although privatization has been largely restricted Age: to small and medium sized state-owned - from 30-50 52 enterprises to date, the pace of privatization and - pre-retirement age 4 restructuring is expected to pick up in the Education: medium term.20 Successful restructuring will - incomplete secondary 9 depend not only on the transfer of ownership to - secondary specialized 29 the private sector, but also the strength of - higher 15 supporting reforms in factor markets. By way of Skills: contrast, in agriculture, there are reports that - skilled 3242 newly privatized farms are being forced to close - office employees and 44 in the face of lack of supplies and extension professionals services. Geographic: - Rural 56 2.18 As the level of payroll and income tax Source: Employment Fund, 1992 contributions fall off further with declining economic activity, and the financing needs of the Employment Fund grow, the demands on the central state budget will increase. At the same time, private firms and farms cannot be expected to perform the same welfare function that state enterprises and collective farms assumed under the Soviet system (such as free or heavily subsidized childcare, food stores, and vouchers for sanitoria).2' If enterprises are to be viable in an increasingly marketized economy, these costs - estimated at around 35 % of labor income in surveys of a range of enterprises elsewhere in the FSU - will have to be cut. In effect, there needs to be a transfer of responsibility of essential social services to government. This in turn raises difficulties regarding inter-governmental relations and financing. Non-essential services, 20/ The privatization that has occurred in the agricultural sector also falls short of transfer of unfettered title on property, with resale allowed only to the state. Many so-called private farms are transferred on terms more closely resembling a long-term lease than a sale. 21/ See Commander and Jackman, 1993, for a comprehensive account of the range of welfare functions performed by Soviet enterprises. 13  such as sanatoria, that are typically provided by the private sector in market economies, should be privatized. Providing Minimum Levels of Social Protection 2.19 The transition to a market economy will involve a fundamental reorientation of the role of government in the system of social protection. Previously many transfers were provided by government irrespective of need. In the future, expenditures must increasingly be targeted on vulnerable individuals or groups, with those who are able providing for themselves through social insurance. Cuts in government expenditure on social protection should not be across the board, but focus on reallocating and reprioritizing funds that are currently targeted. 2.20 During the period of transition and adjustment, poverty is expected to worsen, before longer term improvements for the majority of the population follow as economic growth resumes. While price liberalization should benefit agricultural producers, those with limited access to land, capital, and other inputs - in either urban or rural areas - will experience greater relative and absolute poverty. Enterprise and collective farm restructuring is likely to displace large numbers of workers, given the initial high levels of overstaffing inherited from the Soviet era, and the subsequent falls in output and productivity. 2.21 Liberalization of labor markets and wage setting in the transition will likely increase inequality, due to higher disparities among wage earners, and increase levels of poverty, as many people lose their jobs. Even for those who are working, real wages may fall further, as adjustment and price liberalization take place. However, the biggest income shocks will be felt by the unemployed and their families. 2.22 In the medium term, the Government should allow those who are able to do so to provide for themselves (through social insurance), and those who are not able could be eligible for income transfers from the state (social assistance). Currently, the system does not fall neatly within these definitions although the Government is moving towards the former objective in the Pension Law in force from 1994. With the emergence of a market economy, many of the benefits traditionally paid by the state should shift to a self-financing basis. Social assistance would be paid in the form of targeted cash assistance, family allowances, selected consumer subsidies, and maternity benefits to those individuals who fell below the officially determined poverty line. This would involve defining a poverty line, and identifying those who fall below it. During 1994, the MOL and the Goscomprognozstat were developing a framework for calculation of a poverty line in Uzbekistan. 2.23 A poverty line can be measured in either absolute or relative terms. The most common approach to the former is to measure the cost of a minimum subsistence bundle of goods. Adoption of an austere absolute standard is appropriate in Uzbekistan during the transition period. It should be nutritionally adequate and consistent with the consumption patterns of the poor. The fact that relative prices will adjust to reflect market conditions should be taken into account. The relative proportions of food and non-food expenditures must also be determined. 14  This is difficult in a period of high and variable inflation, when the poverty line must be adjusted to keep up with current prices and changing expenditure patterns of the poor. Goscomprognozstat and the MOL are already tracking the cost of a consumption basket, on a monthly basis, in state stores and on the market. 2.24 The official minimum subsistence level is costed by the MOL. The level, differentiated by age and gender, is presented for March 1994 in Table 2.2. It uses a weighted average of prices in state stores and the market, which is important insofar as other measures (e.g. Goscomstat) show that the price of the basket at the market was about 20% higher than that in the state stores in March 1994. 2.25 The minimum subsistence income level currently used by the Government is based on a food basket that comprises sisTable 2 2I1 51 %, services (26%), non-food items March 1994 (18%), and taxes (6%). The food basket, recently revised by the Government is Subsistence presented in Table 2.3. It is based on the Income structure of average consumption in 1992, Population Group Roubles Co-efficient and amounts to 2700 kilo calories daily. Under six years 37.852 0.48 However, the low food share produces an Child 7-13 years 54,975 0.69 income level that remains somewhat Child 14-17 73,933 0.93 generous, relative to that adopted in the Working age male 117,103 1.47 Working age female 103.824 1.31 Russian Federation. Pensioners 64,014 0.80 2.26 In recent years low income families Average 79,533 1.0 have adjusted their expenditure patterns Source: Ministry of Labor and the share of income directed to food purchases has risen.22 Calculations of the minimum subsistence level should be consistent with actual expenditure patterns of the poor. In the Russian Federation, the proportion of income spent on food is assumed to be 68.3%. But current Government calculations in Uzbekistan assume that only 50% of income goes to food, thereby increasing the overall subsistence minimum. Since the cost of utilities and services remain highly subsidized, and urban housing has been given to occupants, it is unlikely to absorb 26% of income. 2.27 It is recommended that the share of food in the minimum subsistence basket be raised to 80%. The food basket itself should be evaluated for consistency with World Health Organization (WHO) and internationally accepted nutrition standards, as well as for consistency with current consumption patterns of the poor in Uzbekistan. 22/ The falls in real income have likely raised the food share of expenditure to levels much higher than where it stood for the poorest 14% in 1989 (53%). 15  2.28 Other welfare measures, such as food share of expenditure, should be considered as potential complementary indicators of poverty. Reliance on a single indicator of welfare can be misleading. This is particularly true in the context of high inflation. Including Women and Other Groups 2.29 Female labor force participation rates in Uzbekistan during the late Soviet period, as in the other Table 2.3 republics, were high by international standards. In Annual Average Per Capita Minimum 1993, the rate was just over 71%. However, women Consumption (Kg.) have traditionally earned lower average wages than men. Uzbekistan The gender disparities in average earnings in 1989, Bread 158A4 which are not peculiar to Uzbekistan, are shown in table Potatoes 34.8 3.4 below. Vege. 126.0 Fruits 28.8 Sweets 9.0 2.30 The impact of transition is likely to be felt more Meat 21.6 acutely by women for several reasons. In 1992, 62% of Fish 12.0 Milk 80.4 the unemployed were women, rising to 64% in 1993 and Eggs(#) 81.6 up to 96% in some regions, such as Samarkand oblast. Vege. 12.0 This is partly due to the fact that core manual jobs in Sources: Ministry of Labor, Uzbekistan large scale enterprises - held by men - have not yet been subject to retrenchments, while many ancillary clerical positions held by women are the first to be cut. Female unemployment could also be expected to be higher because of the perceived costs to employers of maternity leave and benefits, increased obstacles to work outside the home (such as the collapse of the childcare system) and, possibly, discrimination. 2.31 Among other vulnerable groups are ethnic minorities. Education is in the dominant language of each area, so that those being schooled in Russian (12.2%), Karakalpak (2.6%), Tajik (2.8%), Kazakh (2.9%), and other regional languages risk being marginalized in labor markets, in which Uzbek is increasingly a required - or at least desirable - skill. The outmigration of highly-skilled Russians that has occurred since independence partly reflects this. Language problems may exacerbate other disadvantages faced by minorities, due to living in poor regions such as the Aral Sea. The Government faces competing demands for building national identity, and has to balance the needs of employers, and ethnic minorities seeking preservation of their cultural identity. Increasing Rural-Urban Disparities 2.32 There are already significant rural-urban disparities in several human development indicators, such as child mortality, and poverty incidence. The effects of the transition to a market economy will be felt unevenly by rural and urban people, although the net change in relative welfare is difficult to predict. 16  2.33 While mean per capita income is close to the national average in most oblasts, there are some striking regional differences in average money income. For example the 1992 FBS shows that Tashkent city has average household per capita income that is nearly twice the national average whereas Kashkadarya stand at less than half.23 Nearly three quarters of Kashkadarya's population lives in rural areas. Next to bottom in money income is Karakalpakstan, often mentioned by the Government as a poor region (see below). 2.34 Some negative effects of transition will be felt disproportionately by rural people. International experience suggests that increasing decentralization of financing for social protection and social services during transition will leave people in poorer and rural areas at greater risk. Emerging evidence in Uzbekistan already reflects that local support for social protection offices and schools is typically more generous in cities and towns. This may reinforce existing differentials in basic infrastructure provision, such as much lower rural access to safe sanitation. 2.35 On the other hand, urban residents are relatively disadvantaged in not having access to private plots and animals as a source of consumption and income. They will feel the effects of the removal of food subsidies more acutely than rural agricultural producers, who have either greater own production, and/or higher producer prices for what they choose to sell. Removal of housing subsidies will also adversely affect those who pay relatively higher urban market rents. 2.36 The Aral Sea Basin has become the subject of considerable national and international concern. The people of the region suffer from acute health and environmental problems, given the combination of high poverty rates, and the consequences of sea shrinkage, due to diversion of water for irrigation. Environmental degradation has exacerbated pre-existing problems of low quality water, inadequate sanitation, and high infant mortality (officially 51 per thousand live births in 1992, as against the national average of 38.7).4 Soviet chemical weapons testing has also created health risks of contamination. 2.37 In the wake of long term Soviet neglect of the region, the Government, in tandem with other Central Asian countries and international donors, has begun to address the particular and acute needs of the people of Karakalpakstan. An international agreement with the riparian states has been signed by the Government of Uzbekistan. The World Bank and other donors are trying to develop a framework within which financial assistance could be provided. Extensive and urgent efforts are needed to remedy the problems of the most disadvantaged people in Uzbekistan. 231 Marnie and Micklewright (1994) mimeo. Note, however, that regional price differences also need to be explored: the authors found that Tashkent food prices were about 5% above the national average while those in Kashkadarya and Karakalpakstan were significantly (20- 25%) lower. 241 Adjusted for international comparison (and with Chapter 7), these rates would he 61 and 45 respectively. 17  CHAPTER 3 LABOR MARKETS 3.1 The most effective guarantee of long term social protection is access to good income- earning opportunities. The need for economic growth to generate jobs will be particularly acute in Uzbekistan as a result of high population growth. This requires well-functioning labor markets, and internationally competitive levels of productivity. In the short-term however, the declines in output - together with the economic restructuring and labor market liberalization needed to meet the needs of a market economy - will involve a redefinition of the current social protection functions of enterprises and government, and rising unemployment. 3.2 This chapter covers the broad range of labor market challenges facing Uzbekistan. The Soviet legacy is described first, before recent trends in wages and employment are outlined. Policy options are then examined relating to the role of the Employment Service, minimum wage and incomes policies, and use of temporary employment schemes. Finally, the problems of rural and female unemployment are considered in more detail. Context 3.3 Under the Soviet system, full employment and job security were guaranteed. In this way, the labor market was used to achieve social protection and distributional objectives that are achieved by the tax and social assistance systems in industrial market economies.25 This emphasis resulted in low money wages, overstaffing and low productivity. Incentives for improvements in productivity were low and returns to investments in human capital inadequate. Low wage differentials meant that there was little incentive for labor mobility, and the latter was in fact actively discouraged. Labor hoarding, monetary and in-kind incentives linked to length of service, the underdeveloped housing market, ideology and the propiska system all combined to restrict labor mobility. 3.4 Under the inherited structure of wages, a tariff system related wage levels to the minimum wage. Higher pay tended to reflect the government's economic priorities, rather than efficiency or productivity gains. Although the wage system was fairly rigid, bonuses were widely used to introduce some degree of differentiation. However, since higher compensation reflected planners' priorities, this was by no means synonymous with market-type signals reflecting changes in, say, consumer demand. 25/ An example of the strong continuing welfare function that enterprises are expected to perform is the requirement that each employer reserve 7% of jobs in the enterprise for socially vulnerable groups (Employment Law, 1992, Article 21). In this way, enterprises bear costs that are part of govemment social security expenditure in market economies. 18  3.5 In the Soviet period Uzbekistan, as well as the other Central Asian republics, was known as a labor surplus area, meaning that the working age population outstripped the number of jobs in the official economy.26 This stood in contrast to the western republics of the FSU that faced labor "shortages". In 1989, about 14% of the working age population was "non-employed" (nezanyatye), when the comparable figure for Russia was 5 %. However, it is not clear to what extent this group was actively seeking work in the official economy. About 90% of the "non- employed" were women; a 1990 Goscomstat survey reported that only 46% wanted to work (34% were unsure or gave no answer). 3.6 There is a significant regional dimension to Uzbekistan's employment challenge: like the FSU, the republic itself is divided into labor surplus and labor deficit areas. The former include the densely populated, fertile, rural areas of Fergana, Andizhan and Namagan. Other less populated rural oblasts, such as Dzhizak, as well as urban industrial areas, have been considered labor "shortage" areas. 3.7 However, caution is needed in translating the foregoing Soviet labor concepts into a market economy, and "non-employed" should not be taken to equal unemployed. Part of the perception of rural surplus may be a legacy of the bureaucratic imperative in the command system to provide employment for all people of working age, and a refusal to recognize private plot production or informal sector activity as "real" employment, nor decisions on the part of individuals who prefer not to seek paid work. According to official household budget data, income from private plots amounted to 21% of all money income in 1990; it may have been at least twice this. 3.8 In 1992, almost half a million school leavers entered the labor market. In addition, around 120,000 more were expected to graduate from institutions of higher education and teacher training colleges. Net of retirees, annual labor force growth was around 2.8%. Population projections suggest that the working age population will double by 2015 and most of the growth is expected among the rural population. 3.9 The rate of expansion in the labor force is thus likely to accelerate further. The current cohort of 15-19 year olds is only about 80% of the size of the cohort that will follow, and only 70% of the size of the group who are now 5-9 years old. Moreover, worsening economic conditions could be expected to lead to a greater number of pensioners continuing to work in the short term, and re-entry to the labor market of some who are presently not actively seeking work. Thus Uzbekistan faces all of the employment problems associated with restructuring confronting the Russian Federation and other transition economies, but with an added dimension, that of a population boom. 26/ Mamie, 1992. 19  Structure of Employment-and Emerging Trends 3.10 Figure 3.1 shows the recent evolution of the structure of employment.27 The declining relative importance of state employment, and the emergence of private sector employment, are the most significant trends. The share of state enterprise employees dropped by 3.4% in 1992, and 2% in 1993. However, some of the fall in state sector employment cannot be considered a genuine shift, as employees in leasing enterprises, joint stock companies, and social funds are not entirely out of state control. There is also some confusion about "co-operatives"--a term that encompasses both the semi-private structures that emerged as the only form of legitimate private activity in the late 1980s (sometimes based on access to state capital assets), and consumer cooperatives, meaning state retail outlets in Soviet parlance. Structure of Employment by Type of Employer 1 00 Private farms, personal plots & individual employment _ 80- Social funds & other 8 Collective farms >. 60- Ec, Joint stock, leasing enterprises, joint E ventures, private enterprises & i 40 cooperatives o 20 ,. * State enterprises & consumer 20, cooperatives 1 990 1 993 Figure 3.1 3.11 The increase in the role of the private sector has been, to date, fairly negligible. Official figures are likely to understate the true level of private sector development. However, informal sector and other "undeclared" activity is growing, albeit in an environment that has been more tightly regulated than in many FSU countries. The rise in the proportion of the labor force engaged in "household production" increased from around 10% in 1991 to about 12% in 1993-- although this may equally reflect the fact that rural labor supply growth is fast outstripping formal employment opportunities. It is not clear whether people actually prefer to live off private plots, or are forced, by economic circumstances, to do so. 2' The method of recording labor statistics, inherited from the Soviet period, often gives an unclear picture of labor force characteristics. These difficulties are outlined in Box 3. 1. 20  3.12 In a market economy, people will need to move around the country in search of work. The propiska system of residence permits places unwarranted restrictions on individual employment decisions. While there is some argument as to its actual impact, the propiska should not be used as a pre-requisite for job search or job placement. Box 3.1 - Labor Statistics in Uzbekistan There are several difficulties with labor statistics in Uzbekistan. Some relate to the concepts used under the command economy, and others to inconsistencies between the two agencies responsible for data collection, the Goscomprognozstat and the MOL. Unfortunately the two sets of labor statistics and the information on which they are based, are different. Some figures come from census-based employment statistics. MOL statistics are closer to census-type data in that they are based on the actual number of people in jobs, rather than the more abstract figure used by Goscomprognozstat. The latter are published in the annual statistical handbook, and are based on the number of hours actually worked, which are totalled and then divided by average working hours to give average employment figures. The discrepancies between the two sets of figures can be substantial. In 1991, for example, the two sets of labor statistics gave figures on the total size of the labor force which differed by more than 1.5 million. Wage data are collected monthly from all enterprises (except collective farms, which give information on average wages at the end of each year). Information is given on the number of workers employed,the hours worked, wages, vacancies etc. Each month every enterprise must fill in separate forms for the Goscornprognozstat and the MOL. In 1994, reporting forms were revised to include information on the numnber of workers on unpaid leave, and those working part time. There are also several unemployment figures at any one time. Most commonly cited are the narrow category: those for the registered unemployed and those qualifying for unemployment status. These figures exclude those who are currently seeking work, but still receiving severance pay from their former employer. This group are included in the broad category of unemployed job seekers. The latter broad figure in 1993 has been about twice the level of that for registered unemployed, and is probably a more accurate gauge of the extent of unemployment. Both measures are quoted in this report, though the narrow, registered unemployed is given first, to conform to Govemment methods for recording ulnemployment. Recent Trends in Wages and the System of Wage Setting 3.13 Under the Soviet system, wages were adjusted according to a tariff system. The Government claims that all enterprises in the "non-budget sphere"--i.e. the non-state sector, and those branches of the state sector where wages are not paid directly from the budget, including industry, transport and construction--are not set centrally. However, a unified tariff system established in 1992 sets "thresholds" for virtually all categories of workers, which are set as coefficients of the minimum wage in the particular enterprise. For example, a grade 12 employee is entitled to 3.4 times the minimum wage. The national minimum wage itself is set by Governrent decree, and has been regularly indexed (about every two months in 1993 and early 1994).28 Presidential decrees periodically mandated wage increases--e.g. those of March 1 and June 1, 1994 stating that the minimum and the average wage shall rise by 50%. Under 28/ The actual minimum wage paid in an enterprise may exceed the statutory minimum. 21  a new labor code which establishes a system of individual employment contracts, the minimum salary for different grades of worker is still to be determined by the national tariff. 3.14 A COM decree of August 1994 has introduced changes to wages policy which attempt to create an explicit link between wage increases and output or productivity. Non-budget entities can increase their wage funds in real terms by only 0.7% for every 1% increase in output. Wage increases above that level are taxed at 100%, with commercial banks expected to monitor wage payments to enforce the decree. The decree acts effectively as a real wage freeze. 3.15 The recent path of real wages has been volatile. In 1992, the average real wage fell by 54%, and the minimum wage by 74%. This trend was reversed in 1993, with the rise in nominal wages outstripping inflation for the first three quarters. Over 1993 as a whole, real wages fell by about 10%. There has been no consistent wage indexation formula. In 1993 increases in wages and pensions tended to be announced about a month prior to increases in prices. The wage restrictions introduced in August 1994 are likely to contribute to further real wage cuts (and cuts for those benefits which are linked to the minimum wage). Under the provision, banks have been instructed not to make advances to enterprises to pay wages increases exceeding 70% of the growth in output. The relative movements of prices and wages in 1993 is shown in Figure 3.2. 3.16 In 1992, the fall in real wages and credits to enterprises helped to delay layoffs, despite the large fall in output. In 1993, further increases in the level of credit from the Central Bank to enterprises helped to maintain output levels. The costs of enterprise subsidies were estimated to account for more than two-thirds of the total deficit. Real incomes of the population and consumer expenditure appear to have held up relatively well to early 1994. Such levels of subsidization cannot be fiscally sustained. If the Government reverses its current policy, real wages may fall very sharply, even if substantial numbers of workers are laid off. In August 1994, a governmental commission was established to inquire into wage credits, and commercial banks require authorization from the commission before issuing credits to make wage payments. This is likely to lead to further real wage falls and/or layoffs. Unemployment 3.17 While the pace of labor shedding to date has been slow, institutional reforms have established a framework for dealing with unemployment. In January 1992, the Law on Employment of the Population ended the commitment to full employment, introduced unemployment benefits, established the Employment Service, and created the Employment Fund to finance unemployment benefits, training and other programs. 3.18 The number of registered unemployed in Uzbekistan in the fourth quarter of 1993 was 42,878, or around 0.5% of the labor force. Although very low, represented a tripling of the unemployment rate in the first nine months of 1993. In addition, the number of unemployed job seekers (see Box 3.1) was more than twice the number of registered unemployed, which would give an unemployment rate at that time of around 1.1 %. 22  Price Index, Minimum and Average Wages 3.19 A breakdown by oblast of the registered 1993 unemployed in 1993 shows that regional 6 unemployment is highest in Karakalpakstan, already the poorest oblast in the country (Table 3.1). Other 4 oblasts disproportionately affected are Khorezm and 3 Andizhan, both predominantly rural 2 regions. Tashkent City and Tashkent oblast, which have among the highest ratio of urban workers to Ja-ry March June August September total workforce, also have price index -gln wage average the lowest unemployment rates in the country. Figure 3.2 However, there is no consistent pattern which relates the proportion of urban workers in an oblast to the regional unemployment rate. 3.20 Disaggregated data that would indicate whether unemployment is higher in the towns or the rural areas are not available. In some areas, the differentials are not rural-urban, but between those involved in different agricultural activities. In Dzhizak, for example, there was reported excess demand for cotton workers, but excess supply of pastoralists. 3.21 There is significant regional variation in the proportion of the unemployed who were laid off. For example, in Samarkand oblast, only 16% of the unemployed in late 1993 had been laid off, whereas youth unemployment was high, at 63 % of the total. In Tashkent City, on the other hand, 78% of the unemployed had been laid off, with new entrants to the labor market experiencing relatively little difficulty in finding jobs. This suggests higher youth unemployment in rural areas, as Samarkand oblast is 76% rural. 3.22 Official unemployment figures disguise high levels of hidden unemployment, in the form of workers on leave without pay, or working shorter hours or weeks. The Government previously did not estimate the extent of hidden unemployment, or its variation by region or activity. The only official figures on leave without full pay were for the industrial and construction sectors, and almost certainly understate its true extent, less than 2 days annually on unpaid leave per worker in 1992. However, new reporting forms introduced in 1994 are intended to cover workers on unpaid leave and short time. 23  3.23 Employees and employers (and possibly the Government) prefer hidden to open unemployment. Employees are used to the paternalistic structure of the enterprise and the access to benefits and services it provides, as well as being pessimistic about their chances of finding new work. Employers have been influenced by the absence of a clear reform program, continuing availability of credits from the Central Bank, and lack of incentives to restructure.29 The Government hopes to avoid what it sees as a threat to social stability. 3.24 Open unemployment is likely to rise once subsidy reforms mean that enterprises Table 3.1 face harder budget constraints (see Box 3.2). Registered Unemployed by region, September 1993 Up until mid-1994, soft budget constraints % of Total Regional mean that enterprises are able to borrow from Oblast Unemployed Rate (%) the Central and sectoral banks--and other Karakalpakstan 17.1 2.5 enterprises--to fund payrolls which their Andizhan 11.2 1.3 levels of productivity cannot sustain. From Bukhara 3.8 0.6 August 1994, this practice was to end as the Dzhizak 2.4 0.5 Ministry of Finance directed that bank credits Kashkadarya 7.8 0.8 Iy ~~~~~~~~~~~~~~~Navoi 3.8 0.7 to pay wages should be ceased. As credit Namangan 5.0 0.7 tightens, arrears may grow for a time, but Samarkand 10.0 0.1 lay-offs will become necessary to increase Surkhandarya 4.9 0.9 . . . . Syrdarya ~~~~~~~~~2.2 0.5 overall efficiency. The pace at which credit Syrdarya 2.2 0.5 Tashkent 5.2 0.5 practices are changed will largely determine Fergana 6.3 0.5 how quickly employment restructuring occurs Korezm 11.1 2.2 in Uzbekistan. The first step (that had not Tashkent city 9.0 0.4 been taken as of August 1994) is to introduce 100.0 positive real interest rates. The failure to Total number 42,878 pass bankruptcy legislation also allows unprofitable enterprises to continue operation Source: Ministry of Labor and run up debts. The Government is currently considering bankruptcy legislation. 3.25 There are no official unemployment forecasts for Uzbekistan. Broad predictions can nonetheless be made by multiplying the recent fall in GDP, by the average elasticity of employment to GDP experienced in Central and Eastern Europe (CEE). In Uzbekistan, GDP had fallen roughly 13% between 1991 and the end of 1993. The fall in GDP growth in the medium term is based on the "gradual reform" scenario outlined in Chapter 1. The range of elasticities for five CEE countries is 0.33 to 0.58, with an average of 0.48. The collapse of the ruble zone in 1993, recessions in other FSU republics, and the fall in real wages in Uzbekistan from their 1991 levels constitute a large demand shock. Based on CEE experience unemployment in Uzbekistan could be expected to rise to the range of 4 to 6% after a year of economic restructuring. This would mean around half a million registered unemployed, 12 times the present level. After two years of economic reform, the unemployment rate may rise to 29/ Similar firm behavior was found in Russia: Commander, LIeiberman and YenlCStv 1993, WPS 1167. 24  around 8%, allowing for labor force growth. By the end of three years of reform the unemployment rate is projected to rise to around 14% (see figure 3.3), before it starts falling. Box 3.2 - Unemployment in Central and Eastern Europe As in the FSU, open unemployment in Central and Eastern Europe (CEE) was minimal, with very high labor force participation rates. However, the transition to market economies has resulted, in all countries, in rising unemployment. In 1992, unemploymenit rates reached 13% in Bulgaria, 13.5% in Poland, 14% in former East Germany. anid 7% in Hungary. In nearly all cases, however, the drop in output by enterprises was higher than the fall in employment, and labor shedding was a lagged response to falling output. In addition, the sectoral concentration of unemployment should be noted, with manufacturing particularly hard hit. General patterns have emerged in the unemployment experiences of CEE countries: * Concentration amongst professional and skilled workers in the early stages of transition. However, as total unemployment worsens, the proportion of unskilled workers who are unemployed increases. Currently, the unemployment rate of the unskilled is higher than the overall rate. * The youth unemployment rate is typically 3-4 times the overall unemployment rate, partly reflecting the tendency of enterprises to protect the current labor force. * Feemale unemployment is significantly higher in the early stages of transition, with a gradual convergence in male and female unemployment rates further into the reform process Source: Fretwell and Jackman (forthcoming) 3.26 More detailed unemployment projections take into account such factors as entry into and exit from the labor market, and the speed of enterprise restructuring. While certain basic variables can be projected from demographic information, the number of layoffs and future labor demand is far less certain, both in terms of extent and timing. Figure 3.3 above indicates the upper and lower limits of unemployment, under different reform scenarios. Which of these situations evolves depends largely on the progress and nature of economic reform, and economic growth among Uzbekistan's trading partners. Under either scenario, rates of unemployment reach 14% by the third year of reform--although where unemployment growth is initially rapid it will also begin to fall sooner. While the production structures of the Eastern European economies clearly differ from Uzbekistan, the already high level of overstaffing in agriculture, together with high labor force growth, suggest that the republic's unemployment problem in the short term may be just as serious. 3.27 In the longer term, the increased productivity of enterprises and farms and a growing private sector should allow an expansion in employment opportunities, and the level of unemployment will fall. Improved employment prospects would be more quickly evident in agriculture, if price liberalization occurs and has the intended supply side stimulus. The future sectoral pattern of employment is difficult to predict, though services and textiles have obvious potential. Under market-oriented labor conditions there will continue to be frictional 25  unemployment, aside from the structural unemployment of the transition. In OECD countries, an average of over 10% of the labor Unemployment Projections for Uzbekistan following the Implementation of force changes jobs each year, for Economic Reforms the most part voluntarily. Unemployment(%) 3.28 New patterns of 20- employment are likely to be 15 associated with increased migration, as workers relocate to - take advantage of new openings. Already there is some evidence of 5 movement of rural people to small and medium sized towns. There is also seasonal movement e.g. 1 2 3 4 5 6 agricultural workers moving End of Year during the harvest season from the Slow - Fast reform F ergana valley, where unemployment is higher, to areas such as Dzhizak. Issues of labor mobility are discussed below. Figure 3.3 Notes: Projections of unemployment following the implementation of a comprehensive economic program. The Employment Service and Employment Fund 3.29 The ES and EF were established under the 1992 Law on Employment of the Population.30 They are administered as separate departments by the MOL, which has managed its assets since April 1992. Initially, the ES had some financial autonomy, but was brought more directly within the MOL under a decree of March 1993. The decree also placed local ES offices under the authority of local governments. With incorporation into the MOL, the republican level staff of the ES was reduced from 55 to only 5, so that it is unlikely to be able to perform its dual functions of data collection and analysis, and policy formulation. It appears that the statistical functions will revert to the Goscomprognozstat, and the MOL will have a more direct role in policy formulation. 3.30 In 1993, the ES operated 216 labor exchanges, which are in close contact with local enterprises. The ratio of staff to registered unemployed is about 1:15, and administrative resources for the ES have to date been sufficient. However, with the projected levels of 30/ Also activc in labor policy are the MOL, Goscomprognozstat, the Center for the Study of Labor, Employment and Social Protection, and the Institute of Economics of the Academy of Sciences. The official Federation of Trade Unions will also continue to play a role. 26  unemployment after two years of economic reform (8%) and current staff levels, the ratio would become about 1:230. 3.31 At present the ES is involved in payment of benefits, job placement, job creation, training, financing of public works, and other activities such as staff training and small/medium enterprise promotion. The relative importance of the different activities differs substantially by region, with some areas spending large parts of their budgets on job creation or funding small enterprises. To what extent each of these activities will or should remain the responsibility of the ES is discussed below. 3.32 A well-functioning ES, while an important part of facilitating job placement, cannot by itself increase the number of employment opportunities. A more productive and efficient economy is the key to generating sufficient jobs to absorb both those who lose their jobs during the transition, and new entrants. In industrial economies, employment services act as facilitators, helping to notify job vacancies as they arise, financing training in the skills demanded in the labor market, and initiating temporary employment schemes where appropriate. 3.33 The EF remains in principle an extrabudgetary organization, initially financed by a 3 % payroll tax which was cut to 2 % on January 1, 1994. The 3 % contribution was high relative to many other FSU republics (and the EF ran large surpluses), but would probably be necessary to finance future unemployment benefits. The contribution rate is subject to periodic revision, so that the fiscal demands of benefit payment can be reflected in the rate. The current law gives the government flexibility to increase the rate as necessary, according to labor market conditions. 3.34 In 1992, the EF ran a surplus of around R. 1.27 billion (55% of total revenues), and in 1993, 52% of total revenues. Table 3.6 gives the breakdown of EF budgets for 1992 and 1993. The high proportion of expenditure on job creation reflects that the EF is acting as another source of credit for enterprises who are willing to take on more workers, regardless of their productivity. While it was not clear from official data how much--if any--of the EF surplus is rolled over, a decree in December 1993 transferred the surplus to the budget. 3.35 There will need to be a significant realignment of EF expenditures, if it is to pay unemployment benefits to the numbers of people forecasted above (para. 3.19). If the level of benefit and the eligibility periods are held constant, and unemployment rises significantly, the alternatives for the EF to remain financially viable are to: (i) relinquish some of its present functions; (ii) require substantial transfers from the central budget; or (iii) increase EF revenues, through raising the payroll tax at least back to its former level, or requiring a co-contribution from workers, similar to the 1 % for the SIF. 3.36 On the revenue side, the balance of the EF is critically affected by the size of payroll and the efficacy of collection. The latter can suffer in two ways: either outright non-payment, or misrepresentation of wages paid by an enterprise to lower tax liability. International experience suggests both that enterprises are likely to go into arrears in times of economic distress, and that collusion between enterprises and workers may lower the declared total payroll. 27  Unemployment Benefits 3.37 The payment of unemployment benefits is central to ES functions. In most industrial market economies, unemployment benefits are paid as a form of social insurance, with the duration and level of benefits dependent on individual contributions. Those without sufficient work history may be paid social assistance. Moving toward such a system in Uzbekistan is dependent on further development of the concept of social insurance, while social assistance should be extended to those with insufficient work history (particularly school leavers), and long term unemployed. 3.38 Benefit Eligibility. The fairly complex rules regarding eligibility for unemployment registration, and benefit levels, are summarized below. The definition of those recorded as unemployed in Uzbekistan is not the same as in market economies, while the criteria for receipt of benefits are not fully clear. In 1993, amongst those registered as unemployed, 30% were due to voluntary quits, with the remainder either new entrants to the workforce, or laid off. While it is unclear whether voluntary quits are strictly entitled to benefits, 80% of the registered unemployed receive benefits, so that at least a third of voluntary quits receive benefit. Given fiscal constraints, the Government will need to clarify the rules on benefit entitlement to prevent this practice continuing. 3.39 The payment of benefits is dependent on the unemployed person actively seeking a job. and registering with the ES at least every 10 days. During the period of benefit receipt, the qualifying period for qualification for other benefits such as pensions continues uninterrupted. 3.40 People laid off are entitled to three months severance pay, that is paid by their employer, provided that they register with the ES as "unemployed job seekers" (a separate category from registered unemployed). Workers who resign voluntarily or are dismissed on disciplinary grounds are not so entitled. The level of severance pay equals the previous wage of the individual worker (i.e. a higher average payment than unemployment benefit). It is unclear whether and to what extent severance pay has acted as a disincentive to labor shedding. 3.41 Level of Benefits. Table 3.2 sets out the benefit schedule for unemployment benefits of all types, which vary over time. Benefits that can be paid at a higher level - for those who have worked at least 12 weeks in the preceding year - are related to their previous wage, so that the failure to allow for inflation means that most benefit recipients get not more than the minimum wage. The linking of unemployment benefits to the minimum wage provided a floor for the former during the high inflation of 1992 and 1993. 3.42 T he Government proposes to index unemployment benefits tor inflation, though it is not clear how this will work in practice, given the unsystematic revision of the minimum wage upon which all benefits currently depend. The current schedule of unemployment benefits is unnecessarily complex and time consuming to administer. Unfortunately, the accounts of the EF do not presently give a clear picture of the costs of administering unemployment benefits. 28  3.43 Higher benefits are paid to those who enter training programs, or participate in temporary employment schemes (TES) (Table 3.2). In 1993, the costs of training programs and TES together accounted for only 1 % of the EF budget. 3.44 While the Employment Law limits the duration of benefits to 26 weeks, discretion is granted to local authorities to continue payment beyond this. Current provisions make no other allowance for the long-term unemployed. However, the ability of local authorities to do this is likely to be less in poorer regions and those with the worst unemployment rates, and will become increasingly difficult for even better-off areas, as unemployment rises. The Government will need to address the needs of this group, possibly through the introduction of a general means-tested social assistance benefit (see Chapter 6). 3.45 In order to control the administrative and fiscal costs of unemployment benefits, a flat rate benefit may be desirable, at least during the transition. Since benefits have not kept pace with inflation, the benefit structure is already compressed. The temporary introduction of a flat rate benefit could thus reduce costs, with little effect on the welfare of recipients. Training and public works benefits could then be fixed at rates over the basic level. This approach has been adopted already in Estonia, Latvia, Bulgaria and Poland. 3.46 Alternatively, ceilings and floors on the unemployment benefit level could be set, leaving a compressed band within which benefits vary. This system has been used in Lithuania. A simpler possibility is a two-tier schedule, with those who have sufficient work history receiving the higher level benefit. 3.47 In considering a flat rate benefit, the level at which it is set is critical, determining both its effectiveness as a form of social protection, and its fiscal affordability. A determining factor should be ensuring that all those receiving unemployment benefit are ensured a minimum subsistence income. The standards for setting the minimum subsistence level are presently being formulated by the MOL and the Goscomprognozstat. The minimum and flat rate benefit should be formally delinked from the minimum wage. 29  Table 3.2 Main Categories of Unemployed, Duration and Level of Benefits, 1994 Category Duration of benefit payment Level of benefit Lost job, and worked 12 weeks in 26 weeks 50% of previous average wage preceding 12 months over last year of work (but not more than the average wage nationally), or minimum wage, whichever higher Not worked previously 13 weeks 75% of minimum wage (i) Reentering labor force after First 13 weeks: 100% of the more than I year minimum wage. Subsequent 13 weeks: 75% of (ii) Worked in preceding 12 26 weeks minimum wage months for less than 12 weeks Training benefit Up to 6 months, with job Basic benefit + 75% of previous guaranteed at end of training wage, or 50% if no dependents. Minimum 100% of minimum wage TES No limit currently Basic benefit + 15% Source: Employment Fund Summary of Recommendations on Unemployment Benefits * As unemployment rises significantly, the Government should revise payroll contribution to the EF as necessary. * Consider introduction of a 1 % employee contribution to the EF. * Consider introduction of a flat rate or two tiered unemployment benefit on a temporary basis, set no lower than the minimum subsistence level. * Set flat rate or minimum UB relative to the minimum subsistence level, not the minimum wage. * Clarify entitlement rules on unemployment benefits, to ensure that only those who are unable to find jobs receive benefits, and excluding voluntary quits. Training 3.48 The training and retraining function of the ES will become critical as economic restructuring proceeds. In 1992 about one in five of the registered unemployed were involved 30  in vocational training and retraining in short-term courses of between 15 days and 1.5 months, and longer courses of up to 6 months. Many agencies are involved in training, including the MOL, vocational schools, educational and training units in enterprises, units of the secondary and higher education systems, and specific institutions such as the Tashkent City Center for Training of Unemployed and Redundant workers. 3.49 Presently, unemployed people undertaking training receive their regular UB, plus a training benefit set at 75 % of the wage for the previous year, or at not less than the minimum wage. Those without dependents receive only 50% of the previous wage. With high inflation, the training benefit has tended to fall to its floor (the minimum wage). 3.50 The incentives to undertake training are the additional benefit, and the guarantee given of a job at the end of the training period. The ES establishes a four party arrangement involving the job seeker, the ES, the training establishment, and the prospective employer. To date, 90% of those who have been retrained subsequently started in new jobs. 3.51 The guarantee of a job at the end of training is undesirable. It gives the Government the task of direct employment creation, and is incompatible with the role of the state in the shift to a market economy. Moreover such an arrangement is not sustainable, given the likely tightening in the labor market. 3.52 International experience suggests that it is useful to limit duration of participation in state- financed training programs, as has been done in Romania, for example. This is part of the wider financing question of the costs of training in the context of severe budget constraints, and high unemployment. In Albania, pro-active labor market policy was largely abandoned, in the face of the need to finance income support and poverty alleviation programs. Job Creation and Temporary Employment Schemes 3.53 The ES is currently responsible for job creation schemes. The distinction between training and job creation is not completely clear, given the guarantee of employment after the training period. However, the two activities are recorded separately in the budget, and differ significantly in principle. 3.54 In Uzbekistan, "job creation" means low interest loans to enterprises which agree to take on workers, regardless of whether the new workers are likely to be employed productively. A large share of EF expenditures has been devoted to job creation (over two thirds in 1992 and almost 37% 1993). Yet this is an activity which would not generally be performed by the employment service in market economies, and may quickly become unsustainable, as the level of unemployment and the need for benefit payments rises. This was recognized, in part, by the Government in early 1994 with the introduction of stricter criteria to govern such loans. 3.55 To date, the numbers involved in ES-financed temporary employment schemes (TES) in Uzbekistan has been low, with only 317 people in the first quarter of 1993. However, such 31  programs are a potential mechanism for self-targeting social assistance (Chapter 6 and Annex 2 on targeting). TES should aim to pay a wage that is low enough that it only attracts the poor, but higher than unemployment benefits. TES can have several, potentially conflicting, objectives: (i) temporarily to reduce unemployment, and alleviate poverty amongst vulnerable groups; (ii) to build or rehabilitate necessary public infrastructure, or perform essential maintenance or other services; (iii) to avoid deterioration of basic work skills and habits, and thus obviate the need for later retraining; and/or (iv) to provide a focus for constructive community reaction to the consequences of adjustment, including encouraging the development of NGO and private sector activity through contracting out. 3.56 For TES to be both successful in targeting the poor and fiscally affordable, the wage rate must be such that only those with relatively low opportunity costs are willing to participate. Current schemes guarantee participants the minimum unemployment benefit plus 15%, with the time spent counting towards qualification periods for pensions and other benefits. This seems to balance the need to give incentives to work - rather than simply receive the unemployment benefit - and avoid those who could get "proper" jobs from opting for TES. Limiting the duration of work on TES should help to prevent workers becoming dependent on them. 3.57 TES to date have involved road works, construction, improvement of polyclinics and hospitals, and work in local social security offices, enterprises, community services, as well as collective and state farms. In 1992, TES accounted for 1.4% of EF expenditure, but fell to a marginal 0. 1% in 1993. The future success of TES will depend on many factors - including the level of financing, managerial capacity, monitoring and evaluation of projects, and the extent to which private sector enterprises and NGOs with relevant expertise can be involved in implementation. 3.58 To summarize, while TES could be a useful role in Uzbekistan, these cannot be expected to solve the problem of high unemployment. If the work needs to be done in any event, TES may merely displace higher paid workers who would have been engaged to do it. Only a small proportion of the total unemployed can be employed on TES, due to both the financial and borrowing constraints of the Uzbek government, and the finite number of necessary and viable public works. Objectives may sometimes conflict. Pursuit of poverty alleviation may not necessarily lead to good quality infrastructure works, without good management and supervision, although potential conflicts may be minimized through careful design. Provision for Mass Lay-Offs 3.59 The dangers of enterprise collapse present a challenge not only to individual workers, but also the local ES itself, which must cope with mass lay-offs. The system must deal with this by preemptive measures, and developing mechanisms to deal with crises effectively if and when they occur. Legislation already requires that the Employment Service be notified at least three months in advance of forthcoming mass layoffs, including information on the number of workers affected and their skills (Article 21). 32  3.60 In Uzbekistan, workers who face dismissal are entitled to three months notice, during which time they are paid. In addition, local government authorities may compensate employers for delaying mass lay-offs for up to six months. Postponement may be warranted in certain situations, such as the threatened closure of a large plant in what is effectively a "company town", but normally not where a small enterprise in a low unemployment area decides to close. The balance between minimizing large scale negative social impact caused by closures, and the need to create a legal and economic environment which encourages enterprise restructuring will often be difficult to achieve. 3.61 The enactment of legislation relating to bankruptcy of enterprises could provide a clearer framework for both the labor consequences and impact on creditors of insolvency. Adequate advance notice of dismissal provides an opportunity for workers to adjust to their new circumstances, by various methods including job search and retraining. However, even reasonable notice may not allow sufficient time to acquire the necessary skills for another job, or to save enough to cushion the income shock. 3.62 Some countries, for example Hungary, have begun to develop employer-employee adjustment committees, which establish in-house employment advisory services which are linked to the local ES. Consultation between the ES, the firm, and workers begins once the mass- layoff decision has been made, and could facilitate such activities as counselling and trying to match the skills of individual workers with the vacancy profile of the region.3" Labor mobility -- the ability and willingness of workers to migrate to regions with better work opportunities-- will play an important role in economic restructuring. However, it must be stressed that even the best designed mass lay-off schemes are ineffective without an expansion in the number of productive jobs in the economy. Other Activities 3.63 Other activities of the ES and EF include loans for small enterprise development. These operate alongside the newly-formed bank for small enterprises and entrepreneurship, founded in 1993 with a R.500 million budgetary allocation. The ES makes funds available through its local offices. However, international experience shows that micro-enterprise development is seldom successful (only around 2-3 % cases), and that the unemployed people who benefit tend to be relatively highly skilled. 3.64 Given growing demands on the ES to perform its basic function of benefit payment, it is not clear that it should continue to be involved in small enterprise promotion. Other agencies - both within and outside the Government - are better placed to assess the viability of different proposals. For example, NGOs could develop the capacity to provide detailed small business 31/ The reduction in the average jobless spell of workers who had access to the Service can virtually cover the entire costs of the scheme, through reduction in expenditures on unemployment benefits: see Fretwell (1992). 33  advice to eligible clients. International experience with small enterprise initiatives suggests that interaction between public and private sectors produces the most cost-effective results. Box 3.3 - Dealing with Enterprise Restructuring in Former East Germany There is a tension between ensuring a minimum subsistence level for all the unemployed during the transition period and providing sufficient incentives for individuals to seek private sector employment, or even establish their own small enterprises. An example is in the debate in the former East Germany over the success of ABS (Arbeitsforderung, Baschaftigung und Strukturentwicklung) - or companies for the promotion of employment and structural development - which were established specifically to train and retrain workers during the transition. They are a part of the state-supported employment training scheme. By the end of 1991, there were 330 ABS companies, employing 130,000 workers. While these companies have fulfilled a social protection function for their employees, there is criticism that they give negative incentives, replace private jobs, continue old habits of labor coordination, and preserve uncompetitive jobs in a way that weakens the economy over time. While something might be learnt from East German experience, the whole model cannot be transferred to other parts of CEE, nor Uzbekistan, because (i) the huge fiscal costs (exceeding 25% of the six laenders' GDP); and (ii) the unique institutional setting, whereby West Germany's tripartite arrangement was replicated overnight in the East. Source: M. Kaiser, Active Labor Market Policy in the New German States (1993) Future Role of the Employment Service 3.65 The payment of unemployment benefits, together with job placement, should be the central functions of the ES. Both tasks will place increasing demands on staff as economic restructuring proceeds, and unemployment benefits will become a larger part of EF expenditures. The resources presently being spent by the ES in performing its job creation function should be re-examined carefully. As unemployment and the need for UB rises, the financial and administrative demands of job creation may undermine the ability of the ES to perform its central social protection function of benefit payment. 3.66 The nature of training programs should be re-evaluated. The job guarantee results in a scheme that more closely resembles job creation than market-oriented training. There should be movement towards training programs and wage incentives that encourage the unemployed to develop their skills, without necessarily having the guarantee of a job. 3.67 The use of the FS for NTrapts for knall entu-prise promiiotioni is also similarly an activity which clduh he transterrecl to another -gency. Although some localities can currenitly afford such grants, this s unlikely tl) be the case as unemployment rises. International experience suggests that such loans aid the people who are most able to improve their position. 34  3.68 The dual functions of the ES in assessing eligibility for benefits, and training and job placement put heavy demands on staff and managers. Staff will need to be adequately trained to ensure that the policing function of eligibility supervision does not come into conflict with the service-oriented nature of the job placement and training functions. This may involve personnel specializing in each of the tasks. The advantage of maintaining a single structure is that the extent of job search by those in receipt of benefits is easily monitored. Reconciling the competing demands on staff should be part of a wider program of staff training and improvement of ES technical resources. The EU and World Bank are currently involved in projects supporting these areas (see Box 3.4). Box 3.4 - World Bank and EU support for the Employment Service in Uzbekistan The MOL, together with the oblast and raion labor exchanges, had approximately 200 IBM compatible personal computers at the end of 1993, but no operational applications software with which to support office functions. The World Bank and the EU are providing funding for Uzbekistan to automate offices at all levels. It is estimated that a comprehensive computer system will require around 5 years to develop and implement, with priority being given to procurement of hardware, and the development of registration and benefits calculation systems. The MOL itself will be responsible for the development and implementation of systems, with appropriate technical assistance. This will require the establishment of a Computerization Unit within the MOL - as has already been done with respect to pensions within the MSP - with a staff of about 6, including systems analysts and programmers. The unit would also encourage inter-Ministerial coordination to promote the use of comparable data and information sharing. 3.69 In contrast to the command economy where labor offices were concerned largely with allocation of labor and manpower planning, the ES is now required to be less control, and more service oriented. The increased range of staff skills that are required will need to be reflected in appropriate training and better pay schedules, in order to attract the necessary calibre of staff. 3.70 There should be a reassessment of the regional allocation of staff. Presently, they are allocated on the basis of population (at around 15 staff per 100,000 population), rather than the intensity of local needs. It would be better to take account of the emerging regional patterns of unemployment, and seek to target vulnerable areas. In doing so, the prevalence in rural areas of informal networks of job placement should be allowed for, as should trends in migration. To date, the pattern of migration has been for agricultural workers to migrate to towns and small cities. If this continues, it should be reflected in relative staffing levels. 3.71 Currently employers must notify the ES of any vacancies. However, this should change in order to encourage the private and informal job markets evolving in such places as Tashkent city, and factory gate hiring. The Government has stated its intention to move towards a system that allows complementary roles for the ES and the private sector. Commercial and non-profit 35  private organizations have been licensed to conduct training of the unemployed. In rural areas, the tradition of placement through informal and family contacts will also continue. Summary of Recommendations on Employment Policy * Abolish the tariff wage system as far as feasible, and delink the level of the minimum wage from the wage structure. * Make the payment of unemployment benefits the priority activity of the EF, and reconsider the role and cost effectiveness of job creation and small enterprise development activities. * Discontinue the guarantee of employment at the end of EF financed training. * Develop programs for mass lay-offs, as well as continuing identification of TES where the benefits outweigh the costs. * Encourage transition from enterprise based to market housing, to facilitate labor mobility. * Continue to support the needs of the ES for staff training, increased capacity, and computerization of facilities. * Re-examine the regional allocation of ES staff, and redeploy personnel on the basis of the actual needs of areas. * Encourage the use by the ES of private organizations for training and other functions. Interaction with NGOs in relation to small business development (particularly for women) should also be supported. Wages Policy 3.72 The transition to a market economy in Uzbekistan will involve fundamental reforms to the wage setting process, to lessen centralization and the extent of government involvement. The role of a minimum wage needs to be redefined. The evolving incomes policy can help to control inflation and minimize levels of unemployment, but will have to be supported by monetary and fiscal restraint. 3.73 The decision to stop bank credits for wage payments from August 1994 is welcome, but - while the wage regulation may help to dampen real wages - the decision also reflects greater centralization in the wage setting process. Relative wages should be allowed to adjust according to market signals. 36  3.74 While wage determination should become less centralized, the level of the minimum wage has to be re-evaluated. If the minimum wage in Uzbekistan is too high it may increase unemployment, by guaranteeing higher returns at the expense of fewer jobs. Those adversely affected tend to be new entrants, youth and other disadvantaged groups. During the transition, as unemployment rises and job security is scaled back, the need for wage flexibility is greater. 3.75 In determining the appropriate level of the minimum wage, the policy debate on setting a poverty line is relevant, as a benchmark against which to measure the adequacy of the minimum wage. While the minimum wage should ensure a certain standard of living for workers and their families, the level cannot be raised indefinitely without improvements in productivity. If this were to occur, the Uzbek economy would become increasingly uncompetitive. The setting of the minimum wage by government should be seen as having potentially significant implications for the whole economy, as well as being an instrument of social protection.32 3.76 There is a need to delink the overall structure of wages from the minimum wage. Current evidence suggests continuing reliance on the tariff system throughout the economy. If wages are to give a better reflection of productivity and general conditions in the labor market, employers must respond to the principles of wage setting appropriate to a market economy. The Government has recognized this in July 1994 by limiting credits to enterprises to pay for wages increases. 3.77 For wage policy generally, there are alternative reform options. A core distinction is between a system where wages are determined more centrally, often with the participation of trades unions, employers' groups and government (e.g. Central and Eastern Europe), and a decentralized system, where wages are negotiated at the individual firm level between employers and employees, within general guidelines (e.g. USA). If some method of centrally determined wages is preferred, there is a further choice between systems based on social compacts, and those that are tax-based. 3.78 Centralized Wage Bargaining. More centralized systems of wage determination are found in many countries, including Mexico and much of Central and Eastern Europe. In Western countries, there is tripartite participation of trade unions, government, and employer groups. However, it is difficult to maintain the social consensus on which success is dependent. In the Uzbek context, there is the further danger that centralized wage setting may become a mechanism for reassertion of more general government control over the labor market and the economy. 3.79 In Uzbekistan the official trade union claims to represent over 96% of all workers. However, this will inevitably decline, especially in newly emerging or privatized enterprises, and joint ventures, as well as in the service sector. The Union itself has been closely associated with the Government. 32/ The current practice whereby many cash benefits are tried to the minimum wage should also be re-assessed - see Chapters 4 and 5. 37  3.80 Where tripartite agreement is not feasible, a tax-based system can use an excess wage tax to punish those firms or industries which grant wage increases above a certain norm. Tax- based methods can be used either in conjunction with tripartite agreements, as in Czechoslovakia in 1991, or on their own, as in Poland. However, there is a danger that excess wage taxes based on the overall wage bill penalize firms that should be expanding their workforces. Hence it is recommended that newly emerging private sector should be excluded from such a tax. 3.81 In deciding between the coordination and taxation methods of incomes policy, the existence, stability and credibility of institutions is crucial. During a transition period, there may be insufficient consensus among and within various groups to facilitate the success of tripartite agreements. With the uncertain and variable progress of privatization, workers' representatives represent shifting constituencies, and private and public sector managers may have competing objectives. Under such uncertainty, a punitive tax-based system may be a more feasible approach, implemented by the national tax service. 3.82 Decentralized Systems. In some market economies, wage negotiations take place between employers and employees at the level of the individual firm, within general government guidelines on determining wage increases. This system is used in the USA. The basic guide in wage setting is that increases in pay should not exceed the economy-wide growth in productivity.33 In this way, inflation is controlled, with the support of restrained monetary and fiscal policy. Such systems depend on the existence of competitive labor markets, and a relatively low level of unionization. A fully decentralized system of wage bargaining does not seem feasible at this stage in Uzbekistan. 3.83 To summarize, the most powerful element of a policy to restrain wage increases will be the cessation of general support to enterprises through budget transfers and directed credits. In addition, the Government should consider the introduction of tax-based incentives for enterprises to control labor costs. Women in the Labor Market 3.84 Women are likely to be particularly affected by the adverse employment consequences of the transition.34 Lower average female wages, increasing wage differentials, higher female unemployment rates and the collapse of support facilities such as child care are all dimensions of the problem. The transition may worsen an already inequitable situation. 3.85 Relatively low female earnings may relate to the occupations held by women, and the industries in which they tended to work. At independence, 47% of total employees were women, although they were concentrated in certain sectors. Across all sectors, women are 33/ Commander, 1991. 34/ The Bank is supporting a study examining various aspects of this problem, which should allow firmer conclusions to be drawn on its causes and effects, and inform policy formulation (Mamie and Motivans, 1994). 38  employed disproportionately in low-skilled and unskilled occupations at the lower end of the pay scale. This pattern is evident even in those industries in which there is a concentration of female specialists. Women also tend to be concentrated in certain sectors, such as services (e.g. health, social security, education) and state agriculture, where the rates of pay are below average. Within the industrial sector, women participate more in light industries, such as textiles and food production, than heavy industry. Thus, lower salaries can be traced to both the occupations and industries in which women are concentrated. 3.86 Lower average female earnings might also be traced to the system of maternity benefits, which are generous by international standards. Allowance for potential receipt of maternity benefits may have caused female wages to be scaled down, as benefits are related to the mother's wage. Monthly payments to mothers caring for children were extended to two years, with effect from September 1994. As a result, 310,000 mothers become additional recipients (out of a total of about 1.25 million). Also the amount of benefit was increased nine-fold. The benefit is financed by the enterprise (for working women), and the budget (for non-workers). The current length of paid maternity leave entitlement may prejudice hiring practices against women. If these biases are to be minimized, there should be reconsideration of the current period after the birth of a child for which women can take unpaid leave. The present system may end up hurting the interests of those that it seeks to protect. 3.87 Cultural factors also probably play a part in explaining employer attitudes towards women's work, and persistent wage differentials. The pattern of lower female wages may become self-perpetuating, in that the lower opportunity cost of women's domestic work lewer, reinforces the traditional division of household responsibilities. Large numbers of children and the closer ties of women to the household may also act as restriction on the mobility of female labor relative to male, further limiting the employment opportunities of women in regions where unemployment is acute. 3.88 It has been suggested that ethnicity, as well as gender, played a role in occupational segregation and that the job hierarchy placed Russian men in the most desirable positions, Russian women and Uzbek men roughly equal, and Uzbek women in the worst jobs.35 However, this situation may change in light of the new political realities and the recent out- migration of Russian and other groups, leading to declines in the proportion of women remaining in higher skill jobs. 3.89 Women may of course prefer to work outside the formal economy, seeking greater flexibility and/or returns. However, official data suggest that only a minority of women have access to private plots and dachas, and relatively fewer than in Russia and Latvia, for example. About one in eight Uzbek housewives have such access. 35/ Sacks, 1992 39  3.90 Overall, many of the factors that lead to employment Table 3.3 discrimination against women - Distribution of Gross Monthly Earnings in Rubles such as the sectoral concentration for Male and Females in Uzbekistan 1989 of female labor - will be difficult Lower Range of Value % Males % Females % All to eradicate, as is evident from the (Roubles) continuing gender disparities in 1 5.6 13.7 9.2 market economies. The transition 80 6.3 16.1 10.7 may even widen existing sectoral 91 5.7 8.1 6.8 differentials. Affirmative actions 101 91.9 15.1 13.2 to redress the bias could include 141 11.9 11.0 11.6 increasing the capacity of the ES 161 10.8 7.7 9.4 to address gender issues, gender 181 9.4 5.1 7.5 neutral job advertisement, 201 7.8 3.8 6.0 encouraging NGO involvement in 251 7.4 3.4 5.6 small entrepreneurship schemes 301 3.6 1.1 2.5 for women, and defining the role 351 1.8 0.4 1.2 of local government in the 401 2.2 0.4 1.4 provision of childcare, as Total 100.0 100.0 100.0 enterprises scale back current facilities. It is recommended that Source: Atkinson and Micklewright (1992) the Government consider shortening the period of entitlement to maternity leave, as well as re-assess the potential role for local government and the community in the provision of child care. Rural Labor and Labor Mobility 3.91 Workers in rural areas will be especially vulnerable to rising unemployment during the transition, given rapid rural population growth, lack of commensurate jobs growth and increasing mechanization in the agricultural sector, lowering the demand for agricultural labor. These trends have been apparent at least since the 1960s, but the negative consequences were postponed by the guaranteed job security of the Soviet system. Instead, overstaffing followed, reflected in the declines of days worked per able-bodied farm laborer.36 At the same time, the longer term employment prospects for those already employed in agriculture are relatively good, as agricultural output is expected to recover relatively quickly, in response to output price liberalization, as well as the switch to food crop production. 3.92 Early evidence of higher youth unemployment in rural areas (see paragraph 3.17 above) suggests that there will be relatively higher social and economic costs in regions which are already poor. A reinforcing factor is the lower average quality of rural schools. As farms and enterprises move to market-based hiring, this will make rural school-leavers less attractive 36/ Lubin, 1984 40  potential employees. Rural vulnerability to high unemployment has an ethnic dimension where regions are dominated by particular ethnic groups. The fact that some ethnic groups that have higher birth rates contributes to the regional disparities in birth rates (see Chapter 1), and thus labor supply. 3.93 The traditionally lower mobility of rural labor further differentiates their employment prospects. The greater prevalence of traditional lifestyles and attitudes in rural areas would indicate that this pattern may not change, even if the absolute numbers of workers who become geographically mobile increases. 3.94 Worker mobility throughout the FSU was traditionally discouraged through a variety of economic, ideological and administrative means (see para. 3.3). The propiska, a permit needed to obtain work in enterprises, acted as an administrative disincentive to movement. While it may not have been as important a factor as compressed wage structure and housing shortages in explaining labor immobility during the Soviet era, it could become an increasingly serious obstacle as the other constraints are relaxed. Relaxing administrative mobility restrictions is clearly desirable, as the demand for labor during the transition becomes more market-oriented. 3.95 Legacies of the Soviet system of housing continue to have implications for labor mobility, in particular, enterprise provision of housing and related services often based on length of service. Public housing was allocated on the basis of long waiting lists which discouraged relocation. The Government aims to reduce the general level of subsidies and increase cost recovery over time (see Chapter 4). Workers put on unpaid leave retain access to non-wage benefits, including housing, from the enterprise. While the continuation of free housing and other benefits is a strong disincentive to labor mobility among regions, high housing costs could equally make relocation unaffordable. 3.96 The privatization of housing in Tashkent and other cities has proceeded rapidly. The recent liberalization of the earlier conditions on resale (to the state, or an approved buyer at the original nominal purchase price) will help led to a housing market that is flexible enough to facilitate labor mobility. The Government will need to continue to promote measures that encourage movement towards a more market-oriented housing market. Recommendation on labor mobility * Consider abolition of the propiska system of residence permits. 41  CHAPTER 4 CONSUMER SUBSIDIES 4.1 Under the Soviet system, low administered prices were considered a basic form of social protection, available to all, regardless of need. However, in the transition to a market economy, it is necessary to scale back the number of people and goods that are subsidized, while maintaining certain basic measures to protect the poor. The Government has recognized the importance of targeting in seeking to balance social protection and fiscal objectives. Universal subsidies have high financial costs that can only be justified if the social rate of return is sufficiently high. Universal subsidies that are well self targeted to vulnerable groups may be a more efficient form of transfer than alternative measures of social protection. 4.2 The progress of reforms to consumer subsidies has important implications for the whole system of social protection in Uzbekistan. While they were in place, the need for a targeted social assistance was less urgent. As universal subsidies are removed, the Government will need to move quickly in developing some form of social protection for vulnerable groups. 4.3 The structure of this chapter is as follows. The system of subsidies as it existed up to early 1994 is outlined, portraying an expensive, complicated, largely universal system and extensive price controls that are inappropriate in a market economy. The message that emerges is the need to reduce the total cost of subsidies, and to target transfers selectively on vulnerable groups. The chapter traces recent policy announcements that have significantly reduced the scope of subsidies. The distributional impact of subsidies is explored, although further data are required on consumption patterns of the poor and access to cheaper goods. The Problem 4.4 All subsidies distort price signals, thereby undermining the central role of markets, which is to provide signals to guide resource allocation, in order to maximize productivity. Potential adverse efficiency effects include low producer and consumer prices for food, which give disincentives to producers and importers and could lead to wasteful consumption. From the taxpayers' perspective, subsidies represent a government expenditure which has to be financed, through increased taxes or expenditure reductions elsewhere, or through inflationary monetary financing. The price distortions in the economy created by the inherited system of subsidies imply that Uzbekistan will not be able to generate the necessary supply responses to promote economic recovery and growth. 4.5 There are, nonetheless, certain justifications for the use of subsidies, the most important being - from the social protection point of view - distributional objectives. Subsidies can be justified on the grounds that the poor could not otherwise afford the goods or services in question, and in order to encourage certain population groups to consume particular goods and 42  services, provided that there are not better means of achieving these objectives. To be appropriate instruments of social protection, subsidies must be better targeted than alternative measures, whether cash or in-kind programs. This is an empirical question. 4.6 In the short term the situation is one of "second-best". The absence of adequate compensatory mechanisms for the poor preclude immediate large increases in the prices of all basic goods and services, and for the time being subsidy reform will have to be gradual and staged. The appropriate pace of reform should depend upon the design and implementation of alternative forms of transfers to poor people, either building on existing programs, in particular family allowances, or implementing a new cash social assistance benefit for the poor. 4.7 IA Uzbekistan's transition to a market-oriented economy, there has to be a basic shift in the forms of compensation made to labor. Under the command economy, money wages were low, but administered prices for consumer goods and services, and housing were highly subsidized by either enterprises or the state. In effect, a significant part of labor compensation accrued as benefits in-kind. In the long run, money wages need to rise relatively, as the significance of in-kind compensation is diminished (including subsidized goods and services). This does not exclude the possibility of some in-kind compensation. Even in market economies, employers and employees may still prefer that some part of the real wage accrue in kind (e.g. health insurance). Current Trends 4.8 Chapter 1 highlighted rising expenditure on subsidies - as both a proportion of social protection expenditure and as a share of GDP - showing the rise to around 10% of GDP in 1992, and slight fall to around 9% of GDP in 1993.37 The basic trends in different subsidy groups for 1992 and 1993 are presented in Table 4. 1. It is clear from these figures that ways had to be found to reduce the financial and economic costs of subsidies. Food subsidies account for the largest proportion of consumer subsidy expenditure, though have also been cut the most in 1993. The increase in the relative share of housing and utilities subsidies--from 9% of consumer subsidy expenditure 1992 to 21 % in 1993--and the doubling of the share of public transport subsidies, are the other major changes to the pattern of expenditure. 4.9 Although fiscal expenditures on subsidies remained high, Table 4.1 reflects signs that recent reform announcements began to have some effect in 1993. Further reductions have continued during 1994. Ministry of Finance projections present a significant reduction of budget expenditure on subsidies relative to GDP in 1994 with the implementation of announced policy reforms, falling to about 4% of GDP.38 However, the introduction in August 1994 of a scheme of compensatory payments to virtually the entire working age population - intended partly to 37/ Note that these estimates refer to explicit budgetary consumer subsidies only. 38/ The figure would be substantially higher if a number of subsidized items - e.g. bread and flour - were priced at intemational rather than artificially low domestic prices. 43  offset the effects of food price liberalization - lessens the net reduction of fiscal costs (and reliance on a degree of self targeting) by the Government. Monthly payments were set initially at 100 Sum, then raised to 150 Sum per person for all workers, the unemployed, pensioners, students in all forms of higher education, and mothers with children under 2 years of age.39 This measure thus makes no real attempt to target compensation, in contrast to food subsidies which - although not formally targeted - had become increasingly self-targeted due to quality differentials. The Government announced that the payments would be temporary, and does not intend to index further, so that the benefit would rapidly erode in real terms. As of September 1994, the reform would cost around 3,560 million Sum for the fourth quarter of 1994. 4.10 In July 1993, proposals were announced to remove controls on Table 4.1 procurement prices of cattle, milk, Budget Expenditures on Consumer Subsidies potatoes and onions, and retail prices 1992 and 1993 as a share of GDP. of meat, milk, macaroni, vegetable 1992 1993 oil, sugar, tea, and laundry soap. Food 5.7 5.7 Implicit controls remain through the Fiotiodg and utilities 1.1 14 activities of the Anti Monopoly Public tranisport 0.9 1.0 Department of the MOF (see Noni-food items 1.7 0.5 paragraph 4.38). The Government Meals 0.7 0.5 also created a special fund to cushion the likely impact of price decontrols. Source: Ministry of Finance, Ministry of Trade The objective was to eliminate food subsidies entirely by Notes: GDP figures used: 1992 - R 416. 9 bn. budgetary food subsidies entirely by 1993 (9 months) - R. 2167 bn. January 1994, which was in fact done (except for bread and flour). Rationing coupons were also introduced, on a per capita basis. 4.11 By April 1994 it was evident that the Government was accelerating its program of subsidy reform. Progress had been made in certain areas. Prices are no longer directly set for basic foodstuffs such as eggs, milk and rice, and the degree of cost recovery for housing maintenance is increasing. However, continuing price surveillance and controls mean that the cost of certain subsidies were shifted off-budget to, for example, credit support for enterprises. 4.12 Inter-republic price differentials had created rent-seeking, reflected in the outflow of goods to other former Soviet republics which had liberalized prices earlier. Significant price differentials persisted throughout most of 1994. Table 4.2 shows that prices for meat and sugar in Tashkent were still markedly lower than other selected FSU republics in February 1994. In Almaty, meat was twice the Tashkent price, and in Bishkek, sugar sold for six times the Tashkent price. Coupons, limiting purchases to citizens and to strictly limited quantities, have not been successful in meeting their object of stemming the outflow of goods. Rations remain only for vegetable oil, tea, sugar and flour. 39/ For reference, the minimum wagc at the time of the introduction of compensatory payments was 100 Sum. 44  Box 4.1. The Potential Role of Nutrition Programs and the Case of Honduras There is a wealth of evidence reflecting the adverse economic, let alone human, implications of poor nutrition, including the impact on productivity and the development of cognitive skills and education achievement. However there are very few careful evaluations of the impact of food programs, not least because of the inherent difficulty in measuring impact, and the counterfactual. The World Bank has worked with a number of govemments in identifying mechanisms for reorientating costly universal food subsidies, making better use of limited resources while increasing the impact on the nutrition status of vulnerable groups. In Mexico, of nearly $2 billion spent annually on food consumption programs, poor rural families generally only benefitted about $9, while urban families gained about $200. But even in urban areas only 10% of the nutritionally vulnerable had access to subsidized tortillas and milk. Under a World Bank loan, general food subsidies were replaced with food assistance targeted at needy rural areas and at the urban poor not previously reached. Another example is where food supplements were often provided to all children, supplementary feeding in Bank projects now frequently occurs in targeted programs in conjunction with growtb monitoring and nutrition counselling. In Honduras, where the majority of the population is classed as poor and 60% of households cannot afford a diet that would meet recommended calorie and protein intakes, the proportion of under five year olds exhibiting signs of serious nalnutrition increased from 38% in 1987 to 46% in 1990. The PRAF food coupon was introduced in 1990, in the context of economic adjustment, with the objectives of transferring income to vulnerable groups and reducing malnutrition among under five year okis, PRAF targeted poorer regions of the country, and within those, the poorest villages with least access to potable water and adequate sanitation. While in principle all under five year olds and pregnant and lactating mothers were eligible, in practice Ministry of Health staff working in the health centers determined who could participate. Beneficiaries received coupons monthly, conditional on scheduled health visits and immunizations, that amounted to about 20% of the young child's and women's basic consumption needs. Coupons could be used to buy food and other essential items at local retail stores, or convert them to cash at the bank. However the real value of the coupon declined over the time, because it was not indexed. PRAF appears to have been an efficient approach to provide nutrition assistance, with lower administrative costs and significant health and education benefits, compared to food distribution programs. Problems included increasing adminisative demands on health center staff, and the need to resort to non-transparent, ad hoc rationing schemes that did not necessarily reflect poverty criteria. 4.13 The Government further liberalized the prices of bread and flour in June and August 1994, more than doubling the price of both in August from 0.4 Sum per kg to 1 Sum (bread) and from 0.5 Sum per kg to 1.2 Sum (flour). In October 1994, the Government announced the elimination of direct budget subsidies for bread and flour. However, the prices of bread and flour are still administered, so that implicit subsidies, especially, through the trade regime and state orders, likely remain. In any event, substantial implicit subsidies remain. 4.14 Analysis of the incidence of subsidies and impact of price controls must proceed in the context of rationing and widespread shortages in state stores, so that official prices are often not those actually faced by most consumers.40 Currently, bread seems to be the only good readily available at state prices. Some indication of the differentials between state store and market prices is given by beef and milk prices. In mid 1993, the market prices of both were about twice the price in state shops. By March 1994, meat prices had almost converged, but significant differentials existed for example, for rice and tea. Nonetheless there is a general tendency toward price convergence, except where controls and rationing remain in force--i.e. for flour, vegetable oil, tea and sugar. 40/ The distributional implications of variable access are discussed below. 45  4. 15 The Uzbek economy still relies heavily upon imported foodstuffs, and the state, at Table 4.2 least until April 1994, played a central role in Comparison of prices in state stores procurement. The Government is using part February 1994 of the transfers received through the state Rubles/kg meat sugar order system to subsidize food imports. About 90% of grain needs have been Tashkent 1083 167 imported although the Government is now Moscow 2 742 742 trying to encourage domestic grain Bishkek 1 285 1 039 production. The main sources of food are Almaty 2130 928 Kazakhstan, as well as Canada and other non- FSU countries. The prices being paid by the Source: Goscomprognozstat Ministry of Trade, that centralizes procurement for Uzbekistan, are said to Note: For Uzbekistan, using market exchange rate approximate world market prices. Thus it is for sum coupon. difficult to evaluate the extent of food subsidies in isolation from the system of trade and associated subsidies.4" 4.16 Finally, the evolution of food subsidy policy must be viewed in the context of a move away from cash crops, predominantly cotton, to higher food crop acreage. Private sector activity already makes an important contribution to local food production, representing 75% of domestic output of milk and 60% of vegetables, for example. In the medium term, increasing local production should help to lower the market prices of many foodstuffs, by lowering transportation costs and increasing competition. The Costs Food Subsidies 4.17 Food subsidies have been the largest single category of consumer subsidies. Table 4.1 set out the pattern of expenditure on various subsidies, and shows the dominance of food subsidies in allocations. Table 4.3 shows the breakdown of food subsidies by type of commodity for 1993. 4.18 Bread and flour represented the largest items of consumer subsidy expenditure. Controlled prices for bread and flour were significantly below cost. For example, the retail price was SC150 a loaf in April 1994, with the cost of production at around SC334 per loaf. For each kilo of flour sold, the subsidy was SC50. The Government has rapidly liberalized bread and flour prices, though as of September 1994 they remained below border prices. In June 1994, the Government increased the retail price of flour and bread to an average of SC500 and 41/ See the recent World Bank report on Subsidies and Transfers (Report No. 12934-UZ). 46  SC400 per kilo, respectively.42 From August 1994, prices on bread and flour were increased from 0.4 and 0.5 Sum to 1 and 1.2 sum per kg respectively.43 The price of imported wheat was about $US$130 per kilogram which - converted at the (overvalued) official exchange rate - is equivalent to 1.87 sum per kilo. The Government estimated that, despite the price rises, the monthly bread and flour subsidy was 830 million Sum as of August 1994. International Monetary Fund estimates for 1995 suggest that - subject to changes in the price structure and total GDP induced by policy changes - subsidies on bread and flour could be as high as 6 and 8.7% of GDP respectively, if restrictions on trade were removed, and domestically supplied and imported wheat were priced at a uniform international level. 4.19 The bread subsidy is given at several stages--the import of grains, where the bulk of the subsidy expenditure is directed, for flour, and then for bakeries.44 While all bread baked in Uzbekistan is effectively subsidized through the grain import subsidy, only loaf bread is subsidized at the retail level. The baking of baguettes, rolls and the national flat bread is not explicitly subsidized. 4.20 Not all flour is subsidized out of the budget, only an amount that represents the total rations for the population (seven kilos for rural residents per month, and two kilos each in the city), plus an allocation for budget sphere organizations (e.g. schools and hospitals). This is about 60% of all flour milled in Uzbekistan. The rest is sold at the free price. Where bakeries produce loaf bread sold at the controlled price, they receive a subsidy to cover the difference between costs and retail price. 4.21 In 1993, the bread and flour subsidy amounted to about 4.3 % of GDP. Although the loaf bread subsidy is universal, it is better targeted than other food subsidies, since bread is the major consumption item of the poor. Survey data reveal a strong negative relationship between per capita money income and average expenditure on bread. In four of the poorest oblasts (Kashkadarya, Karakalpakstan, Navoi and Namagan) expenditure on bread comprises over a quarter of total expenditure while in Tashkent city the figure is below 10%. According to household surveys, average bread consumption increased by 10% during 1992. However, survey evidence also indicates that urban residents in 1993 had access to as much as 195.6 kg of subsidized bread equivalent, whereas average consumption was only 166 kg per person. 4.22 There is an important rural-urban dimension to bread and flour subsidy coverage. The bulk of subsidies for loaf bread benefits city residents, and a relatively small proportion (less than 5 % of total bread subsidy expenditures) is directed to the rural majority of the population. 42,' For comparison, the retail prices - in Russian roubles - of bread and flour in Russia and Kyrgyzstan at the same time were 532 and 443 per kilo respectively (Russia), and 283 and 222 per kilo (Kyrgyzstan) at official exchange rates. The converted prices in Uzbekistan were only RR 191 and 328 per kilo. 43/ For comparison, the retail price of bread in Kazakhstan - the largest exporter of grain in Central Asia - at the same time was the equivalent of 2 Sum per kilo on average. 44/ E.g. for mills and bakeries, the Government profit guideline in mid-1994 was 12%. The trade margin for bread and flour retailers was set at 20%. 47  Instead, rural residents are given a larger flour ration so that they can bake the Table 4.3 national flat bread at home. The Selected Food Subsidies distributional implications of the different 1993 (nine months) food subsidies are explored below using Subsidy type As a % 1989 Goscomstat data. Unfortunately of GDP more recent household data are not bread and flour 4.3 disaggregated by income group. More recent household survey information should help to identify which grades of milk 0.1 bread are consumed disproportionally by rice 0.06 the poor, to assess if particular quality tea 0.2 bread should be the target of future subsidies. Source: Ministry of Finance 4.23 Other foodstuffs--including milk, meat, rice, tea and vegetable oil-- which are largely imported into Uzbekistan, have been subsidized through the trade system. By the end of 1993 the prices of rice, tea and vegetable oil were no longer directly subsidized out of the budget, but continue to be subject to price regulation, and are rationed. In addition, meat and milk prices were almost doubled in August 1994, from 8 to 15 Sum per kilo for meat, and 0.6 to 1 Sum per liter for milk. However, the overvalued official exchange rate meant that food imports have been implicitly subsidized (see Box 4.2). Meal Programs 4.24 Food subsidization also takes the form of free and discounted meals as well as food supplements to certain groups which could be useful interventions targeted at vulnerable groups. Examples of the former include free breakfasts for children up to grade five (covering about 2.5 million pupils), and of the latter, essential goods for single pensioners, food supplements for pregnant women with anemia and for children under two years of age, which are means tested. In October 1993, only families with a per capita income below the minimum wage (i.e. R 13,500) were entitled to benefit from such programs.45 The provision of subsidized meals (at 50% of cost) for university students, who are not usually a vulnerable group in any country, was discontinued in early 1994, and replaced with an additional stipend grant. 4.25 In many countries around the world, meal and food programs have been used to improve or maintain the nutritional status of vulnerable groups. In some cases there are also explicit income maintenance objectives, as in the US Food Stamp program. Moreover, objectives may extend to encouraging health service utilization and education of mothers. 45/ Compared to an average wage at the time of R 45,000. It is unclear whether or not this level is the appropriate income cut-off point; it should be revised with the adoption of incomes tested family allowances (see Chapter 6). 48  4.26 Various criteria can be used to target food programs. Many schemes elsewhere in the world use demographic--e.g. the presence of a child under three years--and/or health criteria-- e.g. illness or weight loss. Another possibility is self-targeting, by focussing on goods and services not used by the better off. Geographic targeting can be used to focus on the poorest areas--e.g. in Mexico the tortilla program is located through shops in selected poor urban areas. Means testing can be used--as in the US, where the threshold for food stamp eligibility is set at 130% of the poverty line--or a combination, as in the US Women and Infant Child (WIC) program which uses income and nutrition risk factors. Box 4. 1 presents a case study of experience in nutrition programs in Honduras. 4.27 In 1993, all meal programs represented only 0.5% of GDP in Uzbekistan, while food supplements amounted to 0.8%. However, since these meals are also financed indirectly via subsidies on bread and other inputs, as well as directly, the budget cost of the meal subsidy would increase considerably as the subsidies on the individual food items are removed. In contrast, Ministry of Finance forecasts show expenditure on food supplements falling by more than half in 1994, to only 0.3% of GDP. It is recommended that, in the absence of targeted cash compensations to assist the poor, existing food supplements directed to disadvantaged groups should be maintained. MOF projections show expenditure on meal programs remaining at 0.5% of GDP after the cessation of meals for university students. Non-food Subsidies 4.28 Non-food subsidies accounted for around 27% of total consumer subsidy expenditure in 1992, or 3 % of GDP. These are divided basically between nonfood goods and, more importantly, subsidization of housing maintenance, communal services, and public transport. 4.29 Non-food goods subsidies are limited, accounting for 0.6% of GDP in 1993. They were provided on children's clothing, laundry soap, and furniture for newly-weds. This figure also includes subsidized heating for households. Laundry soap rations have been limited (one bar every two months). Rationed amounts of essential children's clothing are sold at fixed prices, representing half the cost, with reimbursement going to the enterprises and retail stores. Clothes stores keep a list of local families, all of whom are entitled to a limited quantity of children's clothes. It appears that better off families do not claim their quota, due to the poor quality of the clothing. The subsidy for purchase of furniture by newly weds is currently universal. As the provision of furniture could be expected to be made privately by the family, this subsidy should be eliminated. Ministry of Finance plans show budget expenditure on various non-food items falling by half in 1994, to 0.3% of GDP, comprised largely of subsidies on household heating and children's items. 4.30 Housing maintenance and utilities have been heavily subsidized, and not targeted. The implicit subsidy involved in cheap and free housing was impossible to estimate in the absence of comparable genuine market prices, though the magnitude is indicated by 1989 data for the Soviet Union as a whole, showing housing costs as only 2.5% of total household expenditures (1 % on rent and 1 .5 % on utilities). The recent privatization to incumbent residents of housing 49  in Tashkent and other cities transferred the existing housing stock to individuals, so that the subsidies involved in cheap rents are, strictly speaking, no longer a fiscal issue. Box 4.2: The Cost of Implicit Grain Import Subsidies Implicit subsidies are pervasive in Uzbekistan. While they do not directly affect the fiscal balance, large effects follow for the system of incentives. The World Bank has recommended that subsidies which are to be contnued should be made directly, through the budget, so that identification and control is facilitated (see Economic Memorandum, Subsidies and Transfers. May 1994 Report #12934-UZ). The unstable exchange rate makes it difficult to estimate the size of indirect subsidies in Uzbekistan: indirect subsidies on grain and other foods depend on the difference between world market and domestic prices, and therefore the exchange rate used. High monthly inflation rates exacerbate the problems. The import of grain is centralized: the large difference between the world market and controlled low domestic price is only very partially reflected in budget expenditures on consumer grain subsidies. The official exchange rate, at which imports are costed, has been significantly overvalued. In January 1994, the monthly cost of $25 million of grain imports from the non-FSU ostensibly amounted to an amount which is far lower than that if an exchange rate closer to that in the parallel market is used. If a more realistic exchange rate is used , the cost escalates and far exceeds the budgeted cost for bread and flour subsidies for the entire year. Under the 1994 budget provided to the mission in April 1994, the total annual subsidy was only SC 314 billion. The table below illustrates the point that under any plausible exchange rate, the real cost of the grain subsidy will vastly exceed the amount budgeted. Monthily cost of Grain Imports Using Alternative Exchange Rates Monthly cost of grain US $ $1 = SC 3 000 $1- =sc7 000 | S = sc 15 ooo imports from the non- FSU 25 million 75 billion 175 billion 375 billion With the liberalization of the exchange rate over the course of 1994, in accordance with Government commitments and the introduction of foreign exchange auctions, the implicit exchange rate subsidy will be reduced. The Government needs to use a realistic exchange rate in calculating the cost of grain imports: a single exchange rate should be used. The real cost of grain subsidies should be included in the budget calculations. Once this is done, it will clear that large upward adjustments in the retail price of bread will be necessary, or massive increases in budget expenditure on bread and flour subsidies. In practice there is likely to be a combination of both, even though the Government at present does not appear committed to increases in the price of bread over and above the rate of inflation. 4.31 Subsidies continue for housing maintenance, although budget subsidies amounted to only 0.2% of GDP in 1993 (and are forecast to remain the same in 1994) largely because the condition of apartment buildings and services are typically very poor. For housing maintenance, 60% of cost is being recovered from residents, and that rate is projected to rise gradually until the year 2000, when the maintenance subsidies will be eliminated. 4.32 In April 1994 there was still very low cost recovery from tenants for gas, electricity and heating. Although tariffs on gas, electricity, gasoline, and coal were increased in June 1994, they continue to represent only a small proportion of the total costs of provision. There are large gaps between tariffs charged for residential use, relative to agriculture and industry. In March 1994, total monthly costs for utilities in an average (two bedroom) apartment in Tashkent amounted to around SCi,000, compared to an average wage of about SC145,000. Subsidies to cover the losses incurred by providing cheap utilities amounted to 1.7% of GDP in 1993. In June 1994, monthly subsidy costs were estimated by the Government to amount to SCO.7 billion 50  for electricity, SC8.6 billion for natural gas, and SC3.6 billion for coal. By way of comparison, the price of natural gas remained over 19 times higher in Kazakhstan and almost 24 times higher in Kyrgyzstan. These subsidy amounts do not take account of the large implicit subsidies on energy inputs for utility provision. 4.33 The Government has a program to increase the degree of cost recovery for communal services (in particular heating and water). The objective is to increase cost recovery for utilities from households by 10% per year. To what extent this will begin to meet the full costs of provision will depend on the degree to which implicit subsidies through energy input pricing policies are calculated in prices for households. Ministry of Finance plans for 1994 show budget expenditure on utilities falling to 0.9% of GDP. The World Bank has recommended that the gap between residential and industrial tariffs be halved. To take an illustrative example, the average energy bill for a three person household in a 30 sq.m. apartment would rise from around SC1,600 to SC 10,400 monthly; or from 1% of the average wage to 7%, which is closer to international norms (assuming a single earner family in Uzbekistan). 4.34 As the Government moves toward a user-pays system for utilities, it would be advisable to maintain concessionary rates for disadvantaged groups, consistent with ability to pay; although the list of groups requires revision. In principle, a better, although more complicated, approach would be to adopt cash compensation for poor households. The Ministry of Labor was developing such a scheme in early 1994, alongside targeted family allowances. Under the April draft the scheme would provide a fixed (indexed) amount of compensation for poor families who would be identified based on average household income over a previous period falling below a minimum subsistence threshold. The approach was felt by MOL officials to be simpler to that adopted in Russia in September 1993. 4.35 Public transport in urban areas has been heavily subsidized - both in terms of the general low level of cost recovery (see table 4.4), and the discounts (privileges) provided to certain population groups. In 1993, the subsidy on urban passenger transport amounted to 1 % of GDP, or 11 % of budget expenditure on subsidies. Ministry of Finance plans for 1994 reflect the transport subsidy falling by more than half, to 0.4% of GDP. The Government doubled the ticket price on urban transportation from July 1994 to the equivalent of SC 200. Although the running cost per passenger were estimated at SC 181 in June 1994, this did not take account of subsidized input prices, or investment requirements. Despite the price rise, the increased prices of energy import subsidies on public transport result in a monthly subsidy cost of around SC 1 billion in mid 1994. 4.36 All of the housing and utility subsidies have a significant urban bias, being largely confined to the city and thereby excluding the majority of the Uzbek people. This is discussed further below under the distributional implications of subsidy expenditures. 51  Administration and Financing 4.37 Direct budgetary consumer subsidies are administered by the Ministry of Finance and financed out of the republican budget.46 This chapter has focussed on direct budget consumer subsidies. In addition however, imports of grain, meat, milk and pharmaceuticals are purchased with the hard currency proceeds of cotton and other exports. Since the domestic price of these imports is far below world prices, the budget expenditure on subsidies understate the full cost. For grain alone in the month of January 1994, the implicit subsidies involved in state purchases at the official exchange rate amounted to about 3% of projected annual GDP. For 1994 as a whole, as implicit subsidies are incorporated into the budget and the exchange rate is liberalized, it is estimated that the grain subsidy would vastly exceed the amount budgeted (see Box 4.2). Moreover extensive subsidization of enterprises, amounting to about 12% of GDP through the "turnover fund" in 1993, can be seen, in part, as a repercussion of continuing controls on prices in state stores. 4.38 The Anti-Monopoly (formerly Pricing) Department of the MOF--with a staff of 63-- establishes the level of retail prices and, given purchases at world market prices, the size of the subsidies. The basis upon which the MOF sets prices for subsidized goods is not clear. There has been a policy to minimize price rises, in accordance with the general objective of social protection. On the other hand, sharply increasing costs necessitate relatively frequent readjustment (reflected in table 4.4). The general practice has been to announce an across-the- board increase in wages and benefits prior to each nominal price adjustment. It remains to be seen whether the introduction of compensatory payments in August 1994 is a one-off response to recent price liberalization. 4.39 A comparison of the path of prices for controlled foodstuffs relative to the general rate of inflation requires great caution. It is difficult to measure the "true" rate of inflation in Uzbekistan because of the problematic methodologies used by the State Statistical Committee. The rates of inflation for wholesale and retail prices for the year to December 1992, measured point to point, were about 2,700 and 790 percent respectively, whereas rates of inflation using monthly indices were about 8,900 and 900 percent. Bearing these caveats in mind, it is still appears that the increases in controlled prices for basic foodstuffs have not kept pace with the large increase in the wholesale price index (see Table 4.4). Impact and Incidence 4.40 Whether or not the various consumer subsidies are an effective form of transfer to the poor depends on their distributional impact. This follows from the relative consumption and production patterns of different groups in the population, as well as who enjoys access to cheap goods. These issues require empirical analysis, of which there is only a limited amount to date 46/ Between July 1993 and January 1994, the Ministry of Trade was responsible for food subsidies (except bread and flour) and laundry soap. It established an extra-hudgetary fund that received the profits on its import operations (e.g. retail margins on luxury goods). 52  that can be relied upon. In particular, recent data on food expenditure patterns of different income groups is lacking, so that this report must rely mainly upon 1989 data. 4.41 With regard to access, there is no guarantee - in the presence of parallel markets and queues - that the poor actually obtain the subsidized supplies. Over and above the amount of food sold in state stores at controlled prices, the same foodstuffs are being sold at much higher prices in private commercial shops and the market. Given the shortages created by artificially low prices, extraordinary gains (also known as "quasi-rents") accrue to traders who gain access to the supplies. To assess the extent of this problem, information is required about the significance of sales at controlled prices relative to the total amount of trade. If the state sector and purchases at controlled prices represent only a small share of total activity, then the impact of liberalization of all prices would be less. Still, however, the distributional impact depends on who is gaining access to the goods at the low prices. Household surveys of different income groups would help to indicate where families go to buy food: what shares are bought at state stores, cooperatives and the market. Anecdotal evidence suggests that queuing does encourage self-selection; better off families often do not even try to obtain the cheaper goods at the state and cooperative stores. 4.42 In terms of the relative shares of food in the consumption baskets of the rich and poor, the poorest families in Uzbekistan direct a significantly higher share of their household income to food purchases. In 1989, according to the Family Budget Survey, the poorest worker families (less than R50 per capita) spent 54% of their income on food, compared to 31 % for the better off (above R175). On collective farms, the pattern was even more pronounced: 62% as against 29%. More recent (1993) FBS data shows that pensioner families, on average, spend almost 70% of their income on food. However, certain foodstuffs that have traditionally been subsidized are regarded as "luxury" items in Uzbekistan (e.g. milk), in that consumption of the food increases proportionately as household income rises. It is thus important to break down the share of different types of food in the overall food expenditure of households. In 1989 at least, the poor spent proportionately less of their total food expenditure on meat, compared to the better off, and the same was true of eggs. Per capita consumption of meat among the best off worker families in 1989 (more than R200) was about seven times greater than that of the poorest worker families (less than R50). Recent changes in level and structure of relative prices has likely altered this pattern but unfortunately more recent data was not available. 4.43 Preliminary analysis suggested that the incidence of the existing subsidies is proportional rather than progressive: simulations based on 1991 consumption data by income group suggest that the impact of price increases of the order of 20% on subsidized food would be roughly proportional. In fact this net effect disguises two opposing trends: the percentage of income spent on flour and bread declines as income rises, whereas the opposite holds for milk and dairy products (which can therefore be regarded as "luxury" goods, because of the high income elasticity of demand). An additional relevant factor is that liberalization of controlled food prices would tend to increase the income of agricultural producers relative to that of urban residents. 53  4.44 The areas above all require further analysis, based on information about consumption and employment patterns of the poor. Improved and more recent survey data are necessary to address these questions. The surveys to be undertaken with Bank assistance under the Institutional Building Loan will be useful in providing a more reliable data base than that presently available. 4.45 Among all of the subsidies, bread is the most essential item for the poorest group. Even on average, bread constitute 60% of calorie intake in 1992. Bread also represents the major share of public spending on consumer subsidies. The 1989 FBS revealed that bread represented 20% of food expenditures of the poorest worker/employee and collective farm families (under R 50). There are at least three qualities of bread, evidence suggesting that the urban poor tend to consume the subsidized loaf bread. The rural poor bake their own bread using their allocation of subsidized flour. 4.46 There is a significant urban bias in subsidies on housing maintenance, communal services and transport, since these services are not provided in rural areas. For example, the central heating subsidy does not benefit rural residents, who either rely on coal (subsidized separately) or natural gas (that is not subsidized at all). Again, the losses incurred in operating the underground only benefit city residents, although there may be significant externalities, particularly related to pollution (air and congestion) that argue against full cost recovery. 4.47 Given such urban bias, it is important to emphasize that, on average, people who live in rural areas of Uzbekistan are significantly more likely to be poor than urban dwellers.47 In 1989 some 57 % of individuals living in collective farm households were low income (defined as below R75) compared to 39% of individuals in worker/employee households. The population is, of course, predominantly (60%) rural, and there is a high share of total employment in agriculture. Recommendations on Subsidy Reform 4.48 In shifting toward a more effective system of social protection, the Government needs to focus upon developing a minimum subsistence level, and measures to identify and benefit the poor. The World Bank is prepared to provide assistance in meeting these urgent needs--helping to develop household surveys that provide essential data about the changing profile of poverty (under the Institution Building Loan), as well as assistance in designing and implementing social assistance programs targeted to the poor. 47' Altho(ugh this raises the issue of valuation of in-kind income from agriculture, that is dealt with in Chapter 6. See also Mamrie and Nlicklewright 1992 and 1993. 54  Table 4.4 The Path of Certain Foodstuff Prices, the Minimum Wage, and the Price Index in Uzbekistan, January 1992-March 1994 2/91 1/92 4/92 7/92 10/92 2/93 4/93 5/93 7/93 9/93 10/93 1/94 3/94 bread .3 1 3 5 10 10 10 20 20 50 50 120 LOD macaroni .6 3 6 11 22 22 50 100 150' 150- 250' 625' 1400' flour .3 2 4 6 12 12 12 30 30 30 60 250 2D rice 2 5 6 15 25 25 25 * 150' 150' 150' 400' 540 vegetable 3 5 5 6 15 25 25 25 150' 150' 150' 1000' 200D' oil tea 24 30 50 80 120 120 120 250' 800' 800' 800' 30000' 4000' sugar 2 8 8 15 45 100 100 200 300' 300' 300' 1000' 1500' eggs 3 5 15 25 * * * * * * * * * meat 7 30 45 60 80 150 200 400 600 600 600 7000 140C0 milk .5 1.5 2.5 4 10 10 20 40 80 100 100 200 311 vodka 12 35 98 98 200 * * * * * * 1600 13500 soap .4 1. 1. 5. 10 10 10 30 50 50 50 200 'i minimum 70 350 550 1000 2000 2500 3000 3000 11250 13500 13500 30000 45000 wage wholesale 100 475 600 799 1595 4546 5572 7458 price index Source: Ministry of Finance, Bank staff calculations Notes: * denotes "free" price Prices for 1994 are given in sum-coupons 4.49 Certain policy reforms would reduce the economic costs of universal subsidies, while protecting the poor during a period of rapid inflation and change. The basic objective is to minimize the financial cost and adverse economic effects of subsidies, while recognizing circumstances under which subsidies represent the most efficient form of transfer. The recommended actions fall into two groups, those for policy decision, and areas that require further data and analysis. * The cost of implicit subsidies (e.g. due to pricing and exchange rate policies) should be calculated by the Government and included in assessing the overall costs of consumer subsidies. 55  * Increase cost recovery on public transport to take account of implicit subsidies and sectoral investment needs, and implement mechanisms to protect the poor (such as discounts for the unemployed and pensioners). At the same time, consideration should be given to rationalizing the system of transport privileges. * Compensatory payments to offset food price liberalization, should be targeted, as far as possible. * Continue to implement increased cost recovery for housing maintenance, and develop temporary compensation schemes for poor families. * Abolish the subsidies on laundry soap and payment to newly-weds for household furniture. * Meal programs and food supplements for disadvantaged groups should be maintained, with regular review of expenditure levels. * The system of rationing and coupons should be re-evaluated. Once prices are allowed to clear markets, quantity rationing will no longer be required. * The remaining price controls on "free" prices should be examined with a view to their elimination, in parallel with the development of a system of anti-monopoly regulation. Further data and analysis is required with respect to the following: * A poverty line should be developed and adopted for the purposes of evaluating and redesigning transfers to enable better targeting. This should be based on a minimum consumption basket of goods actually consumed by the poor, at prices actually paid. * Evaluation of the actual importance of goods and services with controlled prices - as opposed to those purchased at market prices - in total consumption by income group. 56  CHAPTER 5 SOCIAL INSURANCE 5.1 Pensions, and sickness and invalidity benefits, along with unemployment benefits, constitute the system of social insurance. Family allowances, maternity benefits, and consumer subsidies can be categorized as social assistance. The distinction between social insurance and assistance is made in the social protection systems of many industrial countries, but was not a feature of the Soviet system that operated in Uzbekistan. Social insurance relates benefits to the payment of individual contributions, and acts either to smooth lifetime earnings - as with old age pensions - or in the traditional sense of insurance, for example, for sickness and unemployment benefits. Social assistance, on the other hand, is not dependent on previous contributions, but is designed to stop people falling into poverty. 5.2 Social insurance and social assistance are distinguished in order to emphasize those social protection benefits that the Government should aim to make self-financing (pensions, sickness/invalidity and unemployment benefits), and those that should continue to be publicly financed from general revenues (family allowances, maternity benefits, targeted consumer subsidies). Social insurance benefits also have potentially greater scope for private sector participation, while social assistance is dominated by the redistributional and poverty alleviation objectives that are the purview of government and charities. Pensions 5.3 Up to July 1994, the Soviet Pension Law of 1990 was the basis of the system, with the categories of pensions outlined in Table 5.1. To qualify for the labor pension, the applicant had to satisfy both the age requirement and a work history condition, of 25 years for men and 20 years for women. Benefit levels depended on the length of service and previous salary. Those without adequate work history, who did not qualify for disability or survivor's pensions, received a social pension, which was paid at a lower rate (about half of the minimum pension). For survivor's pensions, the pension benefit could exceed the salary of the deceased breadwinner, depending on the number of dependents in the family. 5.4 The Pension Fund (PF) finances labor, disability (general and work related), survivor, service, and other pensions according to the legislation.48 Table 5.1 sets out the number of pensioners and proportion of total pension expenditure by pension type for 1993. Labor pensioners account for just under 70% of all pensioners, though the level of pension paid to sub- categories of pensions in this group vary significantly. In 1993, 28% were on the minimum pension (20% of all pensioners). The other main groups of pensioners are disabled (12%), those 481 The PF was merged in January 1994 with the Social Insuran:ce Fund (SIF) to tform the ncsw Social Insuralnce Fund (SIFN). References to the PF also apply to the SIFN. 57  receiving pensions for loss of a breadwinner (9%), social pensioners (7%), and those on military pensions (3%). Those receiving a pension and continuing to work account for 13.4% of the total. 5.5 There is no clear relationship between individual Table 5.1 contributions and labor pension Pensioners by Category, and Average Pension, 1993 benefits. Since contributions are Category Number ('000s) % Working Average paid out of the total wage bill and Pension not on an individual basis (per Labor 2272.4 11.0 42,007 employee), there was no explicit Disabled 308.8 17.0 41,988 .'elationship between the individual Military 56.6 2.4 46,069 contribution and the individual On "beneficial terms" 388.6 8.9 47,790 pension, although the pension Total 2502.5 13.4 42,043 calculation on the basis of an Source: Ministry of Social Protection individual's average wage provides an indirect linkage. This has changed under the new Pension Law (see below). 5.6 Extensive provision for early labor pensions has important fiscal implications. The categories so entitled range from teachers and physicians, to miners to actors (after 20 or 25 years service). Selected "exceptions" where people are entitled to an early pension, are set out in Box 5. 1. The scope has been somewhat reduced, but remains large under the new law (see below). Official estimates put the proportion of early retirees at 13.8% of all pensioners. 5.7 Disability pensions are of three types, depending on the degree of loss of ability to work. The categories are: Group I - total disability and require constant attendance; Group II - total disability and are unable to work; and Group III - people suffering from partial disability, who are unable to work in their regular occupation. It is also apparent, however, that some pensioners have been misclassified, as over 20,000 disabled pensioners in groups I and II are working. 5.8 Survivor pensions are given to the dependents who are themselves unable to work, even where the family member(s) were not actually supported by the deceased. Eligible dependents include siblings, grandchildren who have not reached the age of 18 (and do not have able bodied parents) and grandparents who have no one else legally obliged to support them. 5.9 Socialpensions have traditionally been given to those with inadequate work history. This category of pensions has been abolished in the new pensions legislation discussed below. 5 10 Renefit Levels. Since January 1992, the minimum pension has been raised frequently, incrts&nW( ii nominal termls from R350 per month to SC75,000 in June 1994. In real terms (usillg cuiisulinie pricc indices), during the first half of 1992, the level of the minimum pension was below that of 1991. However, since then, increases in the minimum pension outpaced the 58  increase in consumer prices, so that the real levels rose. There has not been consistent policy toward the real level of the minimum and average pension, although the ratio of the minimum to the average pension has been fairly stable in the eighteen months to July 1994. Box 5.1: Selected Categories of Early Pensioners under the new Pension Law * Women employed for at least 20 years in growing and harvesting cotton, tobacco or rice, in the textile industry, or on collective farms. This is a large group, given the importance of cotton production . * Unemployed people qualify for the pension two years early. During enterprise restructuring, this exception will act as a de facto early retirement provision. If 50% of eligible people took this option, there would be around 50,000 new early retirees each year, adding 2% to the number of pensioners. * People in 'ecological disaster areas" are entitled to a pension. The Supreme Council of the Republic defines such areas, and pension entitlement on this basis starts 20 years after declaration of an ecological disaster area. * Teachers with at least 25 years service. Presently this group accounts for over 8% of the workforce. Physicians with at least 25 years in rural areas, and 30 years in cities. Numerous other professions, including railway workers, entertainers, collective farm tractor drivers and mechanics, urban transport workers, social workers caring for the aged and disabled, as well as those who have worked in harmful or severe working conditions, other than mining. 5.11 A new Pension Law, adopted in September 1994, introduced a two tier system of pensions.49 The first tier is a basic pension for all people who have reached the qualification age - 55 for women and 60 years old for men - and have sufficient work history (20 years for women, 25 for men). This is set at 55% of the individual's previous average wage (over any five year period), up to seven times, but not below, the minimum wage.50 Basic pensions range from a minimum of 50 percent of the minimum wage (for those with incomplete length of service) to 100 percent of minimum wage (if complete length of service), to a maximum of 525 percent of the minimum wage (for high wage workers with full service). 5.12 The second tier allows for pension payments above the minimum based on (i) length of work service and previous earnings; or (ii) pension bonuses based on certain legislative criteria. A supplement of 1 % of previous average salary is given for every year of service, down from the previous 1.5%. The bonuses are mostly financed from the Republican budget, and include extra payments to war disabled and veterans' widows. While the second tier, in part, fits within a scheme of social insurance--i.e. length of service and level of earnings--the bonuses are not linked to prior contributions. 49/ Pensions are still classified as old age, disability, or survivor pensions. 50/ Except for Group HII disability and some types of survivors, set at 50% of minimum wage. 59  5.13 Various specified activities, other than employment, count towards the qualifying period, including time spent in higher education. This continues the Soviet practice of reliance upon the pension system to create incentives to human capital formation where the wage structure was compressed. Other activities, such as active military service, mining and entertainment, have preferential qualification rules, whereby each year of actual service counts for two or three years. 5.14 The number of pension recipients has been reduced under the new law. About 350,000 children of disabled parents have been shifted from the pension roll to family allowances. About 179,000 people who lacked sufficient work history have been transferred to the category of "benefit recipients" (that are still, however, financed out of the SIFN although the longer term objective is to shift responsibility to the budget). Responsibility for income support for unemployed people who retire early has been transferred to the Employment Fund. 5.15 The new law introduces additional elements of social insurance. The key criterion determining length of work history and the large base for pension calculation is whether or not social insurance premiums were being paid at the time (Article 32 and 37). Work in individual activity and the private sector is to be included if SIF premiums were paid. 5.16 The Government's costings of the new pension law showed a marginal increase in pension expenditure, (using July 1994 figures), of about 3% of total expenditure on pensions. The cuts in pension expenditures mainly affect a few groups, for whom pension entitlement is cut altogether. Social pensions are abolished as social pensioners move onto "social benefits" which are still, however, financed out of the SIFN. Pension supplements have been eliminated for certain groups, including dependents (97% of them children). This will affect 524,200 individuals, and will save S20 million per month or 7% of the pension bill under the previous law. The pension supplement for those over 80 years of age is also abolished. Other categories which have their pension supplements reduced are war invalids, and blind and single invalids. Further new supplements have been created, such as those for those on merit pensions. 5.17 The numerically most significant categories of pensions will all cost more under the new law, with average old age pensions 106% of their previous level, disabled pensions 110% and survivor pensions 112%. In all, these categories of pensions will cost around S17 million per month (in July 1994 terms) more to provide under the new law, representing about 6% of pension expenditure. The various savings and additional costs under the new law are summarized in Table 5.3. 5.18 The importance of the new pension law is not its effect on expenditures in the short run, but rather in the increased emphasis on principles of social insurance, the adaptation of the pension system to the institutions of a market economy, and the introduction of incentives for individuals to work longer, and not receive a pension while working. 60  Financing 5.19 Uzbekistan's young age structure suggests that it could have avoided the fiscal problems created by pension systems elsewhere. However, the country is an outlier amongst FSU republics in the high proportion of GDP spent on pensions, relative to the proportion of the population over 60 years old (Figure 5.1). Uzbekistan and Kazakhstan have around 6.5 % and 9.5% of their respective populations over the age of 60, yet in 1992, Uzbekistan spent 10.3% of GDP on pensions, as against only 4.7% in Kazakhstan. This was despite the Soviet inheritance of a similar pensions system. Overall, Uzbekistan spent substantially more on pensions than all the European FSU republics except Ukraine, despite a much younger population. In 1993, pensions became even more expensive, rising to 11.4% of GDP. 5.20 The major source of revenue for pensions to the end of 1993 was a payroll tax of 26.4%. Contributions since January 1994 are paid into the amalgamated SIFN. The SIFN is funded by a payroll tax of 32.5 % paid by employers, plus a 1 % worker contribution. Employers are liable to pay the contribution with respect to all staff, including part-time and temporary workers, and the payroll includes regular wages and bonuses. In addition, the SIFN can receive penalties, voluntary contributions, and revenue from commercial and investment activities. In 1992 and 1993, the penalty rate imposed for late payment was 0.5 % per day on the overdue amount. This was cut to 0.2% per day in early 1994 (which compares to the monthly inflations rates of 20- 30% around the same time), giving strong financial incentives to enterprises to delay payments. 5.21 Table 5.2 gives the Social Expenditure in Uzbekistan budget of the Pension Past, Present and Future Fund for 1991, 1992, and (% of GDP) 1993. On the expenditure side, the combined share _ Pensions l-] Subsidies LizJ Unemployment ben. & of administrative and 77 Family allowances i Sickfpay & maternity active lab. market measures "other" costs fell from % GDP around 7% in 1991, to 31.1 only 3% in 1992, and I% 30----- in 1993. Presently, there 25 2192 are insufficient funds for 20 21.17 the SIFN to conduct 17 investment activities, and 15 it is unclear what type of 1O _ ,itfWBfi investments would be . . authorized. 19- 1991 1993 1996-7(with reforms) 5.22 The SIFN has been I unable to finance pension Figure 5. 1 payments out of own Notes: 1996-7 projection with implemenltationi of recommended reforms revenue. Although it Health and Education expenditures are not included. generated a small surplus 61  in 1992 (around 8% of revenues), in 1993 temporary shortages of funds frequently recurred - as indexation decrees increased pensions before payroll revenue. While there was a small "surplus" (2% of revenue over the whole year), 22% of PF revenue derived from bank credits and budget transfers. 5.23 If revenues are less than expenditures at the republican level, the MOF is legally obliged to finance the shortfall. In practice, temporary fund shortages have been covered by (interest- free) Central Bank credits as well as budget transfers. If raion SIFN payroll revenue is insufficient to meet its pension payments, the oblast SIFN redistributes transfers amongst the raions, to cover the shortfall. If the revenue across the entire oblast fall short of expenditures, the oblast SIFN applies to the republican SIFN. 5.24 The SIF's financial position worsened inter alia, because of the lagged effect of indexation decrees on revenue, as well as enterprise arrears. While its financial position may improve with the increased payroll tax rate, these problems remain significant. In August 1993, accumulated contribution arrears amounted to around 11 % of revenues, with delays particularly acute in the farming and cotton sector. In April 1994, arrears were estimated to amount to 8% of revenue. The arrears problem typically reflects some enterprises falling substantially behind with payments, rather than all enterprises underpaying only a little. It is due in part, to the financial condition of the enterprise and agricultural sector. Arrears are likely to worsen as Government credit policy tightens and with the acceleration of enterprise restructuring. The present Law on Enterprises sets out the order of priority for enterprise payments as: (i) wages, (ii) taxes to the central revenue authorities, and (iii) payroll contributions. Banks cannot lend money to firms to pay wages or social insurance contributions, but can be directed by the Government to pay the wages of workers directly. 5.25 International experience suggests that Table 5.2 Pension Fund budget 1991-1993 (billions rubles) under-declaration of the total payroll by enterprises 1991 1992 1993 can also lower contributions. This is a Revenues Insurance contributions 5.4 42.5 423.0 significant problem in Expenditure 8.0 42.4 531.0 Uzbekistan, where the Pension paymiients 7.4 41.1 506.0 wage bill reported to the Bank credit repaid - - 21.0 SIFN is much below that Administration costs 0.01 0.1 0.1 estimate by the inistryOther costs (incI. 3% postal charge) 0.6 1.2 2.5 estimated by the Ministry of Labor. In 1992, the Balance (surplus/deficit) -2.6 +3.4 -108.0 taxable wage bill was only Bank credit 0.5 2.6 115.0 83% of the estimated total, Budget transfer 2.3 0.4 5.0 falling to 68% in 1993. As the software used by Source: Pension Fund the SIF does not record the number of employees, and 62  cross checking with other revenue collection agencies is not done, false declaration could be easier in Uzbekistan than in many other countries. Payment of Pensions 5.26 Administration of the MSP is quite separate from that of the SIFN. Box 5.2 present two brief case studies of local pension administration. The raion or oblast offices of the MSP calculate the amount of benefit to which each pensioner is entitled, and submit the records of due payments to the local post office. The post office charges 3% of the value of the pension for delivery. Every month, the social security offices and postal service carry out mutual settlements on paid-out and transferred assets. 5.27 Previously, the calculation of individual pension entitlements was done mainly at the oblast MSP office, but this function is being increasingly devolved to the raions. Raion MSP offices have an average of 8-10 pension inspectors, who calculate pension entitlements initially, and whenever Presidential decrees raise the level of the minimum pension. Between January 1992 and October 1993, recalculation of pensions had to be done 10 times by hand calculators, with the help of charts issued by the Ministry. Oblast MSP offices will be left mainly responsible for instruction and managerial supervision of raion offices, with some rechecking of pension and child allowance calculations. The staffing implications of deconcentration of functions have yet to be fully clarified. 5.28 MSP staff are relatively evenly spread across oblasts. The biggest differences are in the numbers of home care staff, and - to a lesser extent - the number of staff in raion offices. Variations appear to be explained by the size and type of the beneficiary population, and the adequacy of local budgets. Areas with younger populations will require relatively less home care staff, and more child allowance staff. 63  Table 5.3 Monthly Cost of Pensions Under Old and New Law, Selected Categories (July 1994 prices, millions of Sum-coupons) Pension Category Old Law (SC) New Law (SC) New as % of Old Costs Old Age 193 204 106% Disabled 34 38 110.5% Survivor 21 23 112.5% Social 11 0 Supplements including: 27 12 44% - War veterans 1.1 2 181% - Dependent 20 0 - Total (incl. all categories) 286 277 97% Source: Ministry of Social Protection Social Insurance Fund Administration 5.29 Each quarter, enterprises submit accounts of contributions charged and paid to the raion SIFN representatives. Pensioners who are still working are paid pensions directly through the enterprise, which settles accounts with the SIFN collectors. The enterprises liable to make contributions are identified by raion staff checking the register of new enterprises kept by the hakimiyat, or by the central taxation authorities. There is no provision for penalties in the event of an enterprise failing to register with the hakimiyat. After contributions are collected from enterprises, they are passed to the district social security department. Assets are then transferred to the postal service undertaking home delivery (in about 85% of cases), or paid directly into the individual's bank account. 5.30 The accounts of the SIFN are done manually, in some areas reportedly resulting in delays. The SIFN offices visited by Bank staff were however making timely pension payments. Computerization of the system has begun, though the extent varies by oblast, with poorer areas still operating with calculators. Funds for computerization are being provided from the republican SIFN budget, with money for 25 computers for oblast centers and larger towns allocated in 1993. Even in oblasts where computerization has begun, the number of machines is often inadequate. Computers are still used largely as calculators, with no networking even within individual offices. It is mainly only in urban areas that staff have basic computer skills. 5.31 In November 1993, there were 148 computers for 230 raion offices, purchased from the state budget in 1990. Three oblasts have bought additional computers with local finances. In the offices visited, computers were used only for calculating pension entitlements, and were not networked. At the Republican level, a division of computerization was established within the MSP in 1993, to develop software for calculation of pensions and child allowances, and promote republic-wide networking of the benefit calculation system which would help lessen risk of fraud. 64  Box 5.2 - Social Protection Offices in Dzhizak Oblast, 1993 Dzhizak oblast is a predominantly agricultural area between Tashkent and Samarkand, based on cotton farming on the steppe, and grazing and orchards in the mountainous regions. It has 11 raions, and a population of over 800,000. The oblast ran special social programs that were not done in all oblasts, such as provision of free coal for pensioners in the winter. The local hakim had authorized this, due to the availability of funds. Dzhizak oblast had been the first in Uzbekistan to implement pension calculations at the raion - rather than oblast - level. The office reported that recalculations were done in 2-3 days based on charts issued by the Ministry, and that pension payments normally were not delayed. In a rural raion office in Gallya-Aral, the total number of staff was 25, which included 6 pensions inspectors, 6 payment officers, 2 staff dealing with allowances, and 3 staff who visited pensioners in their homes. It was anticipated that the number of staff would be increased to 34, with the assumption of new responsibilities after the merger of the PF and SIF. In Gallya-Aral (population of 103,000) the office catered for 16,200 benefit recipients, of which 11,275 were pensioners. There was a ratio of pension/family allowance inspectors to benefit recipients of 1:2025, compared to the national average of 1:3500. Around 40% of pensioners were on the minimum pension (R. 14,625 per month at that time). The average pension was R.20,239, and the highest was R. 108,000, paid to war veterans. The Dzhizak city raion office had 17 staff, and expected to be allocated 10 more under the new law, as more functions were devolved from the oblast level. The office catered for 14,000 benefit recipients, with a ratio of I inspector and one payments officer per 3,000 people. They had one computer in the office, but no networking of computers between oblast and raion offices. The staff dealing with pensions and benefits in the city office all had at least technicum level education. In addition, there was a weekly training session (in the city office only), and intensive one month courses in Tashkent, which included computer training. The staff in all oblast offices participate in zone seminars, regarding the operation of the new pension legislation. 5.32 Across Uzbekistan, the PF employed 1,332 staff in 1993, of whom 32 were at the republican level. Over one-third of the staff had been recruited partly in anticipation of assumption by the PF of its new functions, after amalgamation with the SIF. On average 3-4 staff per raion are involved in the collection and payment of pensions, though there are significant variations among raions, even within the same oblast (see Box 5.3). The minimum number of enterprises per collector is 60, with some collectors in Tashkent city having more than 260 enterprises. Salaries are paid from the revenues of the PF. Options for Pension Reform 5.33 Pension expenditures are high and rising in Uzbekistan, due to the significant share of young pensioners receiving benefits, and the relatively high replacement rate of pension benefits. Two further costly features common to other republics of the FSU are the relatively low general pension age, and payment of full pensions to people who continue to work. These problems are discussed in turn below. Ways have to be found to cut pension expenditure, to reduce pressure on the state budget and recourse to bank credits. 65  Box 5.3 - Yakkasaray and Sergeci Raion Pension Fund Offices, Tashkent In Tashkent in 1993, there were 14,000 enterprises registered with the 11 raion offices of the Pension Fund. The average number of staff in each raion office was 4-5. Yakkasaray raion office covers 2,143 enterprises and is one of the largest in the city. There were 8 staff, each covering an average of 267 enterprises. With the assumption of the functions previously performed by the trade unions - the desired staff- enterprise ratio was said to be 1:120, which would require about 18 collection staff in the office. It is unclear to what extent this perceived need will be met. The demands on staff time are exacerbated by the presence of only one computer. In October 1993, the monthly arrears owed by all enterprises in the raion were running at just over 8%. The arrears problem had only arisen during 1992, and had worsened in 1993. Most arrears are owed by a few large enterprises. Sergeci raion PF office dealt with 750 enterprises (500 of which are private), with a staff of 4. An estimated 18 enterprises were not registered. Staff are assigned to enterprises by branch of industry, rather than geographical proximity. Enterprises are visited on foot, and calculations done on records submitted by the enterprise quarterly. There is one computer in the office. Though the number of staff and computers was felt to be adequate for present purposes, the raion office chief was unsure if this would be the case once the new responsibilities were assumed. In both offices there was complete trust in enterprises, both to register in the first place, and then to declare the correct payroll. Registrations were checked against hakimiyat and tax records. The office chiefs did not contemplate tracking down of unregistered informal sector enterprises as within their mandate, nor failure to register as a problem. The number of employees was not recorded, and the size of the payroll for each enterprise was not cross-checked with other revenue collection agencies. 5.34 Raising Pension Ages. Normal pension ages are low by western standards--at 55 for women and 60 for men. In the longer term, raising pension ages could significantly reduce expenditure on pensions.51 A higher pension age will help reduce Uzbekistan's relatively high dependency ratio, that is the share of non-workers (young and old) to active working age population. However, rises in the pension age could have negative employment effects, particularly on youth. If older workers continue to occupy jobs, the public expenditure savings from reduced pension payment are partly offset by higher payment on unemployment benefits, or social assistance. Delayed retirement may also slow the pace of economic restructuring, since enterprises often seek to shed labor through natural attrition. 5.35 It is misleading to compare pension ages with life expectancy at birth. Average life expectancy for women at birth is about 71 years. However, at age 50, the typical Uzbek woman can expect to live to age 77. Likewise for men, life expectancy at birth of 65 years is significantly lower than that which he could expect at age 50, which is over 73 years. These facts should he taken into account in discussions about raising the pension age. 51/ Estonia has a scheduled increase in retirement ages by 6 months a year, to 65 years old for men, and 60 for women. This is estimated to save 0.3% of GDP in 1994 alone, and much larger savings over the medium term. Although Estonia has an older population than Uzbekistan, the figures are instructive. 66  5.36 In addition to the low general pension age, there are numerous exceptions where people working in certain employment sectors are entitled to pensions at a younger age. As a result partly of this, the number of pension beneficiaries is 25% greater than the total number of people over the age of 55. This reflects a pension system that sought to provide non-wage returns to labor to offset a traditionally compressed wage structure. Rather than higher wages being the reward for dangerous work conditions, or high labor demand, the pension system created incentives to labor. As wages are liberalized, these special rules and exemptions should become less necessary. 5.37 The problem of early pensions remains after the passage of the new pension legislation, though it has been lessened somewhat by abolishing early retirement entitlements for several significant occupations such as administrative workers. Although the number of "exempt" categories has been reduced, the most significant groups - in terms of numbers of people affected - have been retained. As macroeconomic conditions deteriorate, many of those who would previously have chosen to retire early may no longer do so. However, they will still continue to receive a pension. Under the new law, conditions for early pensioners have been made less favorable: if they choose to work, they will receive only a minimum pension and those additional years worked are not included in recalculation of their work history. Still, serious consideration should be given to abolishing most categories of early pensions, at least for those who have not already retired under such provisions. 5.38 Reducing High Pension Benefits. High pension replacement rates are a problem. The 1994 Pension Law established a pension base of 55% of monthly average wages calculated over the qualification period. With the addition of supplements related to work history, the average replacement rate for 1994 is projected to be 52 % (across all pension categories). This compares to a rate of around 40% in many European countries and several FSU republics. 5.39 The pension replacement rate could be reduced. Priority should be accorded to maintaining minimum pensions, by using flat rate indexation that would maintain the real value of the lowest benefits. The practice which prevailed through most of 1993 and 1994 was to award increases that rachet up the entire benefit structure--e.g. the Decrees of March and June 1994 that increased all pensions by 50%, thereby benefitting better off pensioners much more than those who have to rely on the minimum pension, and also increasing fiscal costs significantly. The recommended shift to flat rate indexation is progressive in effect, and administratively simple to implement. It could be introduced on a temporary basis, say for 8 or 12 months, and thereafter proportional indexation could be resumed. Nevertheless, previous experience with flat rate pensions (for the first three quarters of 1992) met with strong resistance from pensioners, and the political difficulties of flattening the pension schedule should not be underestimated. 5.40 Under the new law, the average replacement ratio of pensions has been reduced by lowering the percentage of the worker's wage that is added as a work-related bonus above the level of the minimum pension. The reduction in the replacement rate is relatively greater for those on higher wages. Male workers on an average wage at retirement will receive a pension 67  with the suggested reform that is about 81 % of the level under the old system. A worker on the minimum wage would receive a pension about 89% of the previous level. Reducing bonuses to pensions above the minimum level is a relatively progressive measure. 5.41 Reduce Benefits for Working Pensioners. The payment of benefits to pensioners who continue to work involves substantial fiscal costs. In 1993, 10% of pensioners worked, representing about 13 % of the total pensions expenditure.52 Introduction of a retirement test for pension qualification would reduce pension payments, and/or increase the number of available jobs, due to some currently working pensioners giving up their jobs. Alternatively, there could be a reduction in the benefit to which working pensioners are entitled. In Estonia, working pensioners receive a flat rate benefit, equivalent to 38% of the old age pension. The new Pension Law lessens the incentives for working pensioners by not allowing pensioners who continue to work after normal retirement age to use the higher wages from those years in calculating their pensions. The Government has argued that such measures are too administratively demanding, with respect to both monitoring of pensioner activity (especially in the informal sector) and recalculation of pensions. 5.42 Administrative Reforms. The complexity of the current pensions system increases administrative costs, and lessens its capacity to provide adequate benefits. Estonia and Latvia provide examples of reduced pension expenditure, through simplification of the benefits scheme and introducing flat-rate pensions benefits. A flat-rate scheme should be considered in Uzbekistan in the short term, particularly as inflation has already compressed the differentials. In the medium term, earnings-related pensions could be reintroduced. 5.43 Significant administrative savings would follow if pension payments were to be done by direct bank deposit, rather than home delivery of cash. The post office charges 3 % of pension value for this service. There is a wide network of savings banks, although the financial payments system is undeveloped. The estimated savings from channeling payment orders through the Savings Bank are estimated at 2.6% of SIFN expenditures. Another alternative would be to contract out pension delivery, as was done under a pilot scheme in Moscow, for example. Costing the reform options 5.44 Table 5.4 presents a range of possible reductions in pension expenditures, assuming that different reforms were implemented immediately. These are merely indicative of the range of possible cost reductions, rather than precise estimates. The proportions of total pension expenditure saved are the same whatever the rate of inflation. However, they differ substantially in nominal terms, with the current system costing 2.2 (100% indexation) and 1.9 (80% 52/ The number of working pensioners is calculated as the number of pensions paid through enterprises. In practice the pensioner who retums to work, or continues to work after receiving the pension could have it delivered by post. Thus the number of working pensioners and the expenditure on their pensions could be understated. Experience in other countries suggests that the figures used in Uzbekistan could understate the true number by up to 15%. 68  indexation) times more in nominal terms under 30% monthly inflation, and 1.5 (100% indexation) and 1.4 (80% indexation) times under 20% monthly inflation, than the nominal costs under 10% monthly inflation. Clearly the fiscal savings due to lower indexation rates rise with the level of inflation. This emphasizes the need for a coherent approach to indexation if the fiscal and welfare effects of inflation are to be easily tracked. 5.45 The potential savings of shifting to a flat rate pensions - modelled above based on the level of the minimum wage - are huge, amounting to one-third of total pension expenditure over twelve months. The Government experimented with a flat rate pension scheme between January and October 1993, but then reintroduced the more complex schedule. A politically feasible way to introduce flat rate pensions would be to use flat rate indexation, compressing the benefit schedule over time.53 How quickly flat rate indexation would lead to a flat-rate benefit depends on the rate of inflation, and the sustainability of the indexation rule. 5.46 Abolishing pensions for working pensioners would save between around 9% and 13% of current expenditures, depending on the indexation assumption made. The net gain would be partly offset by the reduction in payroll revenues, because some currently working pensioners would retire under such a rule. If the pensions of the early retired were not paid until the normal pension age, pension expenditures would be around 10-14% lower, depending upon the indexation rule. 5.47 A final recommendation is to raise the normal pension age to 65 for men and 60 for women. Although this would clearly need to be phased in practice, expenditure savings have been modelled assuming a one-off increase to the new pensionable ages. Under 100% indexation, this would save around 18% of total pension costs, and under 80% indexation, around 15 % of the costs of the current system. Phased implementation would result in a gradual increase in savings to these levels. A politically feasible option could be to increase pension age by six months each year--i.e. to phase in the increase over the next decade, which means that annual savings would be of the order of 2% of current pension costs. 5.48 The specific reform proposals and various scenarios demonstrate that large savings in pension expenditures are possible, while still retaining a pension structure that is no more stringent than in many industrial economies. While it is difficult to sum the various cost savings outlined above - due to possible double counting - a total cut in pension expenditures of at least one third is possible. This would bring pension expenditure back to around its 1991 level, of around 7.5% of GDP. 531 Flat rate indexation involves increasing all benefits by the same absolute amount as is needed to keep the minimum benefit at an agreed real level. This results in the proportional increase for those on higher benefits being lower, so that over time all benefits are equalized to the agreed level e.g. if the minimum benefit is 60 units, and it is raised to 80 units (the agreed minimum subsistence level), then all benefits are raised by only 20 units. For those on 100 unit benefits, this is only a 20% increase, while for those on 60 unit benefits, it is a 33% increase. The lowest benefit is now over 66% of the higher benefit, as opposed to 60% previously. With successive indexation rounds, the gap narrows to almost nil. 69  Table 5.4 Relative Cost of Pensions tJnder Different Pension Structures and Wage Indexation Rules Reform % cost of current system % cost of current system (Full indexation) (80% benefit indexation) Abolish pensions for working pensioners 87.5% 91.2% Abolish pensions for early retired 86.1% 89.8% Introduce flat rate pension at minimum wage level 66.3% 69.0% Raise normal pension age to 65 (men) and 6(1 (women)' 81.6% 85.0% Source: Bank Staff Estimates Notes: Estimated total pension costs are expressed as a proportion of costs if the current pension structure were retained. Based on assumption of 1()% monthly inflation for the first three quarters of 1994. Two estimates of expenditure reduction on pensions are based on (i) 100(% indexation for the entire period, and (ii) 100% indexation for the last months of 1993, followed by 8(0% indexation in 1994. Pensions would be linked to wage increases. Assuming a one-off increase to higher pension ages. Strengthening Pension Administration 5.49 Revenue Collection. The institutional division of responsibility for the various aspects of the social protection system needs to be re-examined with a view to streamlining where possible. The proposed creation of a social protection working group could be a catalyst for reform. A unified system of revenue collection would avoid unnecessary administrative replication, without significantly undermining the functions of the agencies involved. If separate central tax and extrabudgetary fund revenue collection were preferred, rationalization could still be promoted through unified collection of the payroll taxes that are presently collected separately by the SIFN, the trade unions, and the EF. 5.50 Even if separate collection agencies are retained, simple cross-checks could be introduced to ensure accurate information from enterprises on the size of the payroll, and other details. And even without cross-checks, the SIFN could record the number of employees in each enterprise in order to check that it was broadly consistent with the declared size of the payroll. Such records would also facilitate any future moves towards an individual - rather than enterprise - based contribution and benefit system. 5.51 The penalties that can be imposed by the SIFN on enterprises need revision. The large extent of under reporting of the wage bill was noted above (para.5.23). This would involve (i) introducing substantial penalties for failure to register for tax purposes; and (ii) raising fines for late payment to more punitive levels (which would require some linkage to the rate of inflation). Recent changes have gone in the opposite direction. Another penalty - which only the central tax authorities are presently authorized to impose - could be fines for individual enterprise managers who consistently pay contributions late. 70  5.52 It will also be necessary to clarify which investment activities the SIFN is permitted to undertake. Projected deficits in the mediunm term may act as a spur or brake on investment activities. In any case, there should be guidelines on allowable investments, for example, the extent to which overseas investments (such as foreign government bonds) are acceptable. 5.53 Pension Payments. Evidence suggests that the raion MSP offices are coping with the frequent indexation of benefits. Introduction of flat rate pension indexation would obviously have the advantage of administrative simplicity. While the devolution of work to raion level should improve the speed with which claims are processed, this has occurred without any computer support, and work previously done by oblast office computers is now being done manually at raion offices. There is a need for technical support, ranging from the immediate provision of calculators, to fuller computerization of the system in the longer term. 5.54 Individualized Contributions. Under the new pension law, the key criterion as to whether particular earnings are to be included in the calculation of the average monthly wage determining the pension benefit level is whether or not insurance premiums were paid on the earnings. Further movement towards an individual-based system of contributions could be an objective of future pension reforms, in order to establish a more direct link between contributions and benefit. The introduction of an individual accounting system would be an important first step in this process. Initially, SIFN contributions could be marked separately on individual pay slips. Later, properly individualized contributions and accounts could be introduced, though its administrative feasibility depends on the pace of computerization of the pension system. 5.55 More equal distribution of contribution rates between employer and employee could be introduced in the longer term. This would give a pension contribution system that was more in line with international practices, in both industrial and middle income countries. 5.56 If computerization of both MSP and SIFN offices is to be fully effective, it will need to be complemented by staff training, and the development of networked systems, at a minimum within each oblast, and preferably at a republican level. The SIFN could consider the costs and benefits of establishing its own technicum for staff training, along the lines of the MSP institution, where computer skills are an integral part of courses. 5.57 Where a worker is permanently prevented from working, as a result of job-related illness or injury, the present provisions are unclear as to the length of time that must elapse before the worker goes onto disability benefit. More definite time limits within which the expert panel assessment must be made are needed to prevent the erosion of the real value of the benefit to the individual. Once inflation is brought under control there may be scope for introducing a scheme of lump sum compensation, rather than putting the disabled worker on a pension. 5.58 Private Pensions. The possible future participation of the private sector in pension provision will be an important aspect of policy formulation in the medium term. In April 1994 there was discussion of non-governmental entities entering the pension sphere, although the Government had not yet made a decision. At present, the absence of a strong regulatory regime 71  and financial markets cautions against involvement of the private sector in pension provision. Some considerations in the development and desirability of private pensions - particularly the merits of Pay-As-You-Go (PAYG) systems, as opposed to funded schemes - are discussed in Annex 1. Summary of Pension Recommendations * Simplification of the current pension structure, reducing the number of different categories of pensioners, and supplements, in order to meet the objective of adequate payments to pensioners within fiscal constraints. * In the short term and on a temporary basis, flat-rate pension indexation should be adopted that is designed to preserve the real value of the minimum pension. An earnings-related scheme would be advisable in the medium-term. * Reforms to the current pension schedule, with the aim of lowering the replacement ratio of pensions to about 40%. * Consideration of a phased rise in the current normal ages for pension qualification, preferably to a uniform 65 years old for men and women, or alternatively to 60 years old for women, and 65 for men. * Eliminate the existing array of categories entitled to early pensions, on the same phased basis. * Discontinue the eligibility for pensions of those who are still working, or cut the level of the benefit received as a proportion of the minimum pension. * The monitoring system for disability pensions should be adequate to ensure that only those with disabilities receive them. Introduction of lump-sum payments to those who are permanently impaired, but whose ability to work is unaffected, should be considered as inflation is brought under control. Sick Pay and Other Benerits 5.59 In Uzbekistan, absenteeism has not been high by international standards. The average number of sick days per year is about 7, which compares favorably with many Western countries, such as France (21 days) and Sweden (23 days), as well as the current Russian average of 8 days. Public expenditure on sick pay was just over 0.5% of GDP in 1992. Table 5.6 sets out the breakdown of the SIF budget for 1992 and 1993. This section outlines the current system of sick pay provision, and future reforn options available to the Governrment, in light of international experience and an analysis of the incentive and equity effects of alternative approaches. 72  5.60 Sick pay, for the bulk of the workforce, has been financed from the previous Social Insurance Fuind (SIF). It was administered by the official trade union until January 1994 when it was transferred to the SIFN which amalgamated pensions and social insurance. About a third of the labor force fell outside the national SIF. A separate SI Fund exists for the almost 1.2 million collective farm workers. Independent trade unions for cooperatives, entrepreneurs and railway workers have also established separate social insurance funds, which represent over 300,000 workers. A significant proportion of workers (around 15%) are not presently contributing to any of these funds, including the self-employed and those working in private enterprises and farms. 5.61 The SIFP was financed from payroll contributions of 5.6% by employers and employees, as noted in Chapter 2. However, from January 1994 sick pay has been administered by the amalgamated Pension and Social Insurance Fund (SIFN). For workers, this is unlikely to have significant implications. However, the shift in responsibility for sick pay has diminished the role of the official trade union. The staff of the union has been reduced by 70%, to 200 nationally. 5.62 Various other benefits were paid from the SIF, including maternity benefits and the expenses of sanitoria, health resorts, and children's health facilities. From January 1994, the trade unions only administer sanitoria and other health facilities. 5.63 It does not appear that sanitoria are a benefit that is well-targeted on the poor. There are strong arguments for privatization of sanitoria and other resort facilities, or full cost recovery, if the facilities are to be publicly financed. In this sense the 2% payroll contribution that currently accrues to the union to finance these operations is too high. 5.64 As the proportional costs of sanitoria rose in 1993, the share of the SIF budget spent on sick pay and maternity benefits fell. Maternity benefits are related to the mother's previous wage subject to recalculation whenever an increase for budget enterprises is announced. The floor is the minimum wage. 5.65 Workers could be taking fewer sick days on average in the last two years, as economic conditions have worsened or taking more sick leave in enterprises where capacity is low. Without a breakdown of the average length of sickness, it is difficult to conclude which effect dominates. Evidence from market economies suggests that the bulk of sickness payments are made to a relatively small number of employees, who are sick for extended periods. If this is the pattern in Uzbekistan, the inflation effect would be expected to have been the main cause for the relative decline in sickness payments. 5.66 For those who are claiming sick pay as a result of work injuries, benefits are set at 100% of wages, irrespective of the length of service. All sickness benefits are paid until recovery, or until the worker is transferred to disability benefit, given the appropriate medical documents supporting claims. Sickness benefits for those whose injury or illness is not work-related are paid according to the length of continuous service or number of children. 73  5.67 Table 5.5 sets out the level of sickness payments for each category of worker and type of Sick Pay Levels injury/illness. Payments are also made to sick workers having more Category of Illness/Injury Benefit Level relative than 3 children, rather than years of to previous wage service. Since the average number A. Not work-related of children per woman is about 5, a (i) 8 or more years 100% substantial number of both male and continuous service female workers would thereby (ii) 5.. years 80% qualify. If the provision is continuous service motivated by poverty concerns, having the threshold at only 3 continuous service children may be too low. (iv) Over 3 children 100% 5.68 The requirement of irrespective of service continuous work with the same B. Work-related employer, with only limited Irrespective of work history 100% provision for job changes, is an unnecessary restriction on mobility. Source: Social Insurance Fund Labor mobility should be encouraged, to aid the transition to a spatial and sectoral distribution of labor that more closely fits the needs of a market economy. Provided that work history can be proved, there does not seem to be any need to stipulate length of service. 5.69 Disability pensions. It is presently unclear when people on sick pay should move to disability benefits, as necessary. For the significant number of people on disability pensions who are working, the Government could consider withdrawing their pension benefit. In the longer term, those who have a permanent loss of faculty, which does not impair their ability to work, should be compensated by a lump-sum payment, rather than through the pension system. However, while high inflation continues and savings instruments remain undeveloped, this is not feasible. There will also be a need to guard against the numbers of disability pensioners increasing substantially during the transition, as OECD experience suggests that there is commonly a link between rising unemployment and higher numbers of people receiving invalidity benefits. Safer working conditions would help to contain the number of beneficiaries. 5.70 There are a number of incentive problems which could arise in the design of sick pay schedules. The extent to which these incentive problems are important will determine the shape of the payment schedule. Issues include whether there should be a waiting period of a few days before sickness payments begin, whether the replacement rate should be equal to or less than the wage, and whether there should be a limit to the number of sick days available. 74  5.71 Presently, sick pay is not a benefit that is causing fiscal difficulties, and the structure can . ~Table 5.6 difficulties, and the structure can Social Insurance Fund Budget - 1992 and 1993 be left largely intact. Minor (Millions rubles) improvements that could usefully be put into the system are outlined 1992 1993 below. Total income 7576.8 73634.8 of which (%): 100 100 Payroll contributions 98.6 98.4 Summary of Slick Pay Payments for sanitoria vouchers 0.9 1 Recommendations Other 0.6 0.6 Total expenditure 5952.5 71593.2 * The SIFN should have a of which (%): 100 100 base, so Sick pay 40.4 39.0 larger revenue Dase, so Maternity benefits 30.6 26.0 that workers in all sectors Birth allowance 6.8 7.0 are contributing to the Funeral allowance 0.5 0.7 fuind(s). Sanitoria, health, resorts, child health 20.7 26 fund(s). ~~~~~~~Other 1.2 1 Surplus as % of revenue 2.2 2.7 * The eligibility requirement Expenditure as % GDP 1.3 1.6 of continuous work with the same employer should Source: Social Insurance Fund be dropped, to encourage labor mobility. * Automatic entitlement to sick pay at 100% of the wage on the basis of having more than 3 children should be reassessed with a view to increasing the threshold, or abolition. Sanitoria and other resort-type health facilities should be privatized, or run on a full cost recovery basis, and no longer subsidized by the trade unions out of a general tax. In this case, the 2% payroll tax should be reviewed. - The maximum length of time for which someone can be on sick pay, before being put on disability benefits, should be clarified and enforced. * After inflation has stabilized, consideration should be given to initiation of a lump sum compensation scheme for those who are rendered permanently unable to work as a result of work-related illness or accident. Further data and analysis is required with respect to the following: * A poverty line should be developed and adopted for the purposes of evaluating and redesigning transfers to enable better targeting. This should be based on a minimum consumption basket of goods actually consumed by the poor, at prices actually paid. * Evaluation of the actual importance of goods and services with controlled prices - as opposed to those purchased at market prices - in total consumption by income group. 75  CHAPTER 6 SOCIAL ASSISTANCE 6.1 The Government provides a range of categorical benefits that cover many needs. However, despite the relatively extensive nature of the benefit system, the people of Uzbekistan lack a comprehensive social safety net. There are gaps in the benefit structure that leave some people without benefit cover and, particularly during the period of transition and restructuring, there will be groups of new poor requiring assistance. In addition, there are a growing number of workers on low real wages. 6.2 This chapter discusses the issues involved in developing social assistance benefits that would provide an effective social safety net for the individuals and groups that are not currently adequately protected. It highlights the challenges facing the government in designing a system of social assistance that fulfills the basic function of protecting and targeting those in need, while operating within fiscal constraints. For the time being, reforms to existing benefits are likely to have the most immediate and effective poverty alleviation impact. The Government is pursuing such reforms, alongside introduction of a pilot scheme for targeted local social assistance, and calculation of a poverty line for means-testing purposes. However, the introduction - albeit on a temporary basis - of flat rate compensation payments for virtually the entire working age population in August 1994 appeared as a step away from a targeted system of social assistance. 6.3 As targeting is increasingly emphasized in future programs, it will be necessary to design a system that minimizes leakage of benefits to the non-poor, and is applied consistently across the country. To do this, a clear profile of poverty - with variations by region, age, gender, and ethnic group - will be required. Soviet data, which is the basis of current poverty and inequality information, has several methodological shortcomings which are discussed. Work is currently underway for household surveys which should give a more reliable assessment of the profile of poverty in Uzbekistan. 6.4 The structure of the chapter is as follows. First, the system of family allowances as it existed in mid-1994 is outlined, with evaluation of two reform proposals that had been under Government consideration. Recent reform initiatives in social assistance are then discussed. The system of maternity benefits and privileges is then outlined. Options for targeting social assistance are described. This raises issues of defining the poverty line and identifying those who fall below it. The chapter concludes with recommendations for strengthening various aspects of the system of social assistance. Family allowances 6.5 Family allowances collapsed between 1991 and 1993 as a proportion of total social protection expenditure, from 15% of GNP in 1991 to only 0.5% in 1993. Real levels of benefit 76  had declined to extremely low levels, due to failure to index during periods of high inflation. In 1990, in principle, family benefits were tied to the minimum wage, as adjusted. However, unlike pensions and unemployment benefits, the link has not been preserved. The Government appears to have recognized this, with reforms in 1994 which have raised the level of family allowance expenditure back to 1.9% of GDP. In addition, the introduction in August 1994 of a pilot scheme of cash payments targeted predominantly at low income families - which is administered outside the traditional family allowance channels - demonstrated the Government's commitment to poor families (see 6.30 below). 6.6 In early 1994, the Government was considering alternative options to target and increase the poverty alleviation impact of family allowances. The first step, in July 1994, was a Presidential Decree which rationalized the system of family allowances, and increased the level of benefit, but deferred an attempt to tackle targeting. Up to 80-90% of the poor in Uzbekistan are families with children (see Chapter 1). Children would thus appear to be a suitable category for targeting of benefits, if the objective is to include the great majority of the poor. However, only one third of all families with children are poor. If family allowances are to be substantial enough to alleviate the poverty of poor families and fiscally sustainable, targeting of benefits for families is essential. A means-test could supplement the categorical targeting of families with children, in order to exclude from benefits the 2.7 million families with children who are not poor, though the administrative complexities of adequately measuring incomes should not be underestimated. 6.7 Evidence from CEE countries suggests that family benefits were the only type of cash transfers that were redistributive, as opposed to the uniform distribution (regardless of income) of other benefits. Evidence on Russia, however, suggests that family allowances were positively correlated with income.54 Further analysis is needed to establish the distributional incidence of family allowances in Uzbekistan.55 An assessment of the correlation between large family size and involves analyzing representative survey data with an appropriate equivalence scale.56 6.8 Family allowances are paid for a variety of reasons, relating to poverty relief, income- smoothing, and historical and cultural factors. The income smoothing function of family allowances ensures that consumption is stabilized during periods when a household's needs are relatively high. It is difficult to achieve if, as in Uzbekistan presently, most of the population is experiencing serious income shocks. Cultural factors will affect the extent to which the public demands family support to be state-financed or privately provided. 54/ See Milanovic, 1992. 551 For example, recent evidence from Pakistan casts doubt on the conventional view that larger households tend to be poorer, raising questions about the redistributive nature of family allowances per se. See Lanjouw and Ravallion, 1994. 56/ Equivalence scales are intended to adjust for varying household composition and size, and are discussed in detail in Annex 3. 77  Structure and Financing 6.9 No unified legislation currently governs the structure of family allowances in Uzbekistan that was inherited from the former Soviet Union. Family allowances are paid to virtually all individuals up to the age of sixteen (eighteen if a student). Through various decrees, there were traditionally multiple levels of benefits payable to families with children (see Table 6. 1). Some disadvantaged families receive additional grants. Families may receive all the benefits for which they are eligible, with no offsets. Recent reforms to family allowances have attempted to simplify the schedule of benefits, and are described below. 6.10 Funding of family allowances is complex: the Republican budget, local municipal budget, and SIFN all play a role.57 The program costs family allowances are currently met from the SIFN budget. In 1993 the program cost just over R.21 billion, paid to 8.4 million children. This was equivalent to 0.5% of GDP. 6.11 Eligibility is established by a birth certificate, making an important element of the administration of family allowances simple and cheap. 6.12 There is no single agency responsible for setting and payment of family allowances. For children whose parents are employed, payments are made through the place of work. For the unemployed, social protection offices make the payments. In the case of children without parents or under guardianship, education agencies pay the allowances. The local social protection office is limited to dealings with enterprise bookkeepers, and no account is taken of administration costs for the current scheme. 6.13 Until September 1994, the complexities created overlapping benefits. The number of benefits was rationalized in order to improve the system's effectiveness.58 The large number of small cash benefits were replaced by two main types of monthly family allowance. Increasing Pressures 6.14 Uzbekistan's high birth rate leads to a large average family size of more than 5 persons and exceeding 6 in rural areas. A high youth dependency ratio of 0.88 in 1994 translates into considerable fiscal demands on working individuals to support the young.59 For comparison, 57/ The reason for the inclusion of some family benefits as part of what were previously Pension Fund expenditures arose from the needs of Soviet policy makers to balance the payments from the various republican PFs, given the differing age structures of their populations. This was to avoid the poorer Central Asian republics, with younger populations, effectively making transfers to the PFs of the richer European republics. 58/ In Russia, recent reforms have also eliminated overlaps (if mothers and children are regarded as different beneficiaries). The unified monthly child allowance is supposed to cover all children up to 16 years (18 if a student), and is financed out of the oblast budget. 59/ This is defined as the ratio of population 0-15 years to the population 16-60 years of age. 78  about 44% of the population is age 15 or younger, whereas only 24% of the population of the Russian Federation are under working age. 6.15 The present system of child allowances Table 6.1 ostensibly provides a Uzbekistan: Family Allowances 1990-1994 (Ql) universal benefit to all families with children. Pre-June 1, 1991 1/5/94 families with childrenl. (Rouhles) (SC) The real level of benefit was allowed to fall so much that there is self- Monthly Benefits by Age Group selection, although the reduced value of the Birth of child 2xmw 2xmw benefit has left it playing a Up to 18 months 165 330 marginal role in assisting 18 Months to 6 years' 120 240 even the least well-off. Thev Goverment needsltof To single mothers with child up to age 6 120 270 The Government needs to whether to rely on a To single mothers with child age 6-162 60 270 revamped family allowance Up to age 16' 60 270 as a major poverty Quarterly comipensation' alleviation tool, or to develop alternative Up to age 1.5 50 300 methods of transferring Up to age 6 55 330 income to poor families. Age 6 -18 35 397 More resources could be directed into existing NOTES: Monthly benefits in rubles and sum coupons for each child. For children not receiving subsidies under social securty, for students benefits in kind, such as not receiving stipend, until completion of education. free or reduced rate school ' Students not receiving stipends may receive this allowance up to age 18 ' These benefits are means-tested. meals, that could target children categorically, but not discriminating between children from poor and better-off families. 6.16 The motivation for income testing is typically a desire to concentrate benefits on the most needy, in order to reduce program costs. In Uzbekistan, family allowances could be made a more effective anti-poverty measure, by raising the level of benefits and confining receipt to the poor. The pilot social assistance scheme for low income families introduced in 1994 represents a first step towards this goal. The Government should also seek to change the public perception of benefit provision, away from the old attitude of benefit for all, to an understanding of social assistance as a safety net to catch the most vulnerable in society.' Uzbekistan's poverty profile suggests that families with children represent the largest share of the poor. With rising 60/ This effort risks being undermined by the introduction in August 1994 of monthly cash compensation payments to virtually the entire working age population. 79  unemployment and continuing declines in output, it is likely that the incidence of poverty among families will worsen rather than improve, at least in the short to medium term. A revised form of child allowance could therefore be an appropriate way to target poor families with children. However, a detailed profile of poverty is needed. Data are lacking on the distribution of income around the poverty line. If most families have low incomes, attempting to identify the poorest one third by income testing is not necessarily the most efficient way to target benefits on children. Reform Proposals for Income Testing in 1993 6.17 Against this background both the MSP and the MOL have, independently, been developing alternative policy strategies for family allowances. The policy objective of the MSP proposal was to target allowances by income testing, on those children in families below a poverty line (that has not yet been officially set). The minimum subsistence per capita level of income would be multiplied by the number of family members to produce a threshold family income i.e. there would be no account for household economies of scale in consumption. The threshold is set against the actual family income, averaged over the preceding 12 months. Any shortfall is divided by the number of members in the family to produce a level of benefit for each child. The amount due may be limited to four children. There would also continue to be a one-time payment made on the birth of each child. 6.18 The MOL proposal was similar in approach, in that it attempts to target the poorest families, by means of an income test together with more subjective criteria. It would set a minimum subsistence level for one person, based on a basket of goods. Levels vary with age of the family member. The sum of all the individual amounts is the minimum total income level for the family. The yearly average combined income of the family is set against this amount, and the deficit paid as child benefit. There is an upper level of benefit to restrict allowance rates for large families. 6.19 Both proposals had problems in their design and implementation. Formal income data is used to assess claims and no account is taken of the value of in-kind or other informal sector incomes. As far as possible, all income should be taken into account, in particular from agriculture. The treatment of income itself is a more basic problem. Averaging income over the year preceding the claim does take account of fluctuating (e.g. seasonal) earnings, but fails to reflect the impact of changing circumstances when a family's income changes because of unemployment or changing jobs. It would be necessary to index past earnings to take account of high inflation. 6.20 The MSP proposal has further drawbacks. First, since the family threshold is a multiple of individual minimum subsistence income, the threshold level for larger families is disproportionately high, due to the failure to account for economies of scale in consumption. A better approach is to take account of the reduced income requirements of each additional dependent. The second drawback is that families would receive a progressively higher benefit for each additional child, because a fixed number of adults in the family will have an 80  increasingly smaller effect on the level of allowance for each additional child. This effect is felt more acutely in single parent families, as the number of adults in the family is initially lower. The overall result is that not only are household economies of scale excluded in the design of allowances, but that larger families are actually compensated for each additional child at a higher rate. This could be justified as a distributional tool, if large families are poorer. 6.21 The MSP proposal treats the child, rather than the family, as the target group. In its present form, the benefit will not bring the family income up to the minimum level, and therefore children will still be in families with incomes below the subsistence minimum. This effect is more noticeable in smaller families because of the relative importance of the adults in the formula for calculating benefit. 6.22 Overall, the MOL proposal provides a better, but complex, approach to setting the family minimum income level. It attempts to capture all income, albeit in a complicated manner. The treatment of income (averaged over a 12 month period) has the same drawbacks as the MSP proposal. The MOL proposal produces a more equitable outcome, by the use of an equivalence scale, and it does raise the income level of the whole family to the minimum level. 6.23 The precise fiscal implications of the reform proposals are unclear, but are at best neutral under the MSP proposals, and involve increased program costs under the MOL approach. Both proposals have not contemplated the full administrative costs, assuming that the administration will be borne by the enterprise. Both rely on a high degree of self-declaration on the part of claimants. However, means-testing is administratively demanding and costly, and this should be taken into account. Recent Reforms to Social Assistance 6.24 From September, 1994, the Government simplified the previous array of cash and in-kind family allowances to a "single system" (reducing the number of allowances from 18 to 2). The benefits are to be linked to the minimum wage, which in the immediate term would raise the level of benefits. The monthly allowance for children under sixteen years will increase 25-fold. However, further targeting of family allowances administered through the usual channels has been deferred. Benefits will vary according to the number of children in the family: from 10% of the minimum wage for a one child family to a maximum of 50% for five children.61 6.25 Introduction of the revised system will increase expenditures on family allowances from less than 0.5% of GDP in 1993 to about 1.9% in 1994, and about 2.6% in 1995, depending on Government policy toward the minimum wage. 61/ The average benefit per child reflects the Government's objectives on family size: the average benefit per child is 10% of the minimum wage for one child, 10% for two, 13.3% for three, 10% for four and 10% for five. Beyond 5 children, the average benefit per child declines with increasing family size to 5 % per child in families with 10 children. 81  6.26 An August 1994 decree - On measures to strengthen social protection of low income families - introduced a pilot scheme for targeted social assistance, predominantly aimed at low income families. The scheme is administered outside the regular family allowance cash benefit system. A budgetary allocation representing over 1 percent of GDP was made to be supplemented from local budgets and non-governmental contributions. The target groups for assistance are families with very low aggregate income, particularly large families, and single pensioners and the disabled. Eligibility is to be determined by respected members of local communities, at quarterly community meetings. Depending on perceived need, families may receive payments ranging from 1.5-3 times the minimum wage. It does not appear that any formal means test is provided for. It is not clear whether these measures are intended as longer term supplements to existing family allowances, or interim targeting measures pending a more thorough overhaul of social assistance benefits. The reliance on local knowledge in identifying poor families and individuals avoids many of the technical issues and costs of a formal means test, although may suffer from possible lack of objectivity and consistency in application. 6.27 In addition to the foregoing reforms to targeted social assistance, an August 1994 Presidential Decree introduced monthly cash compensation of 100 sum for virtually the entire working age population, including all workers, pensioners, students in higher education, and vocational and technical schools, mothers with children under 2 years of age, and those registered with the ES as unemployed.62 This was a measure to compensate for continuing food price liberalization. Payments are to be financed from various sources, including the Republican budget, SIFN, EF, and enterprise resources. For "self-financing" enterprises, half the cost will come from the budget. The total cost, for the fourth quarter of 1994, is around 3,560 million sum, with the major expenditures on payments to workers (around 2,500 million sum for Q4) and pensioners (around 575 million sum, allowing for working pensioners). The measure was officially described as temporary and, after an initial increase to 150 Sum, no further indexation was intended. Virtually universal compensation on this basis was untargeted - but at the same time more progressive in impact than the previous practice of proportionate indexation of all wages and pensions. 6.28 The recent measures reflect movement away from the desirable objective of having a single social assistance benefit. A single benefit would be desirable for several reasons: (i) it would reduce the overlap between different social assistance benefits that exists currently, eliminating problems of double dipping; (ii) it would allow consistent targeting criteria to be applied in determining social assistance benefits; (iii) it would streamline administration of social assistance benefits, and allow more coherent development of benefit policy. If the Government decides that a single social assistance benefit is desirable, it will need to decide which of the current programs will perform the function, and the role of social protection offices therein. 6.29 The current view among the ministries dealing with social policy is that the Government is adopting a phased approach to the introduction of a targeted system of social assistance. The first step - rationalization of the schedule of allowances and introduction of a pilot scheme of 62/ For reference, the minimum wage in August 1994 was 100 sum. 82  targeted cash benefits - has just been completed. The next step is to refine and introduce a more formal targeting mechanism, to be implemented over the next 18 months. The Taxation Department has been charged with developing a system of incomes declaration by the end of 1994. The Government felt that the means testing being proposed by the MSP and MOL was too complicated, and not feasible at this stage. The MOL now has suggested that means testing be introduced on a pilot basis in, say, three oblasts. World Bank technical assistance may be useful in this regard. In the short term, the pilot scheme for assistance to low income families relies on the knowledge of local communities in identifying poor families. The introduction of untargeted compensatory payments in August 1994 has added greater urgency to the Government's efforts to develop appropriate targeting mechanisms. 6.30 Experience in other countries shifting to a market economy suggests that as enterprises try to contain their costs they become increasingly less willing to provide social support. New private enterprises will be unwilling to take on complex bureaucratic tasks on behalf of the government. Neither proposal addresses the problem of administration. Even without a policy response, benefit administration is likely to change by default as enterprises withdraw their support. It is better that this change should be managed by the MSP, and the opportunity used to move benefit administration to the local offices of the MSP. However, raion offices currently do not have the capacity to take on this work. To do so requires a significant investment in new staff, procedures, staff training, both management and technical, and if possible the introduction of computerization at an early stage. There is therefore a need to start building institutional capacity at local level to deal with an income-tested benefit. This is an appropriate area for World Bank technical assistance. This would place the local office organization in a position to take on a broader based income-tested social assistance program if that is thought appropriate in the medium to longer term. Summary of recommendations on social assistance: * Decide whether or not family allowances are to be a primary instrument to reduce poverty. * If family allowances are to be used as a primary poverty reduction tool: (a) the revised family allowance should be indexed quarterly, according to past movements in the retail price index. (b) work should continue on developing incomes tests to further target family allowances, in particular: (i) in setting the total family minimum income level, account should be taken of the reduced income requirements of each additional dependent; and (ii) ensure that as far as possible all income is taken into account, in particular in-kind income from agriculture. (c) the administration of family allowances should be moved from the enterprise to the local offices of the MSP. 83  (d) there should be significant investment in new staff, new procedures, staff training, both management and technical, and if possible the initiation of computerization at an early stage. * If family allowances are not to be used as a primary poverty reduction tool: (a) it is less important to index family allowances. (b) there will need to be a uniform approach to eligibility for whatever cash benefit is the preferred policy tool. * In either case, there is a need to monitor the impact of recent changes, and measure whether the assistance is benefitting poor families. Maternity Benefits 6.31 High female labor force participation (of over 70%) in Uzbekistan has been made possible by a system of concessions to women that assisted them in combining full-time work with child-rearing and domestic responsibilities. Maternity leaves provided in Uzbekistan are more extensive than in most middle-income countries. Although the benefits have been adjusted from time to time, it is widely felt that they are not adequate to meet the increased cost of living for families, particularly families headed by women. Maternity benefits are administered by the employer, and financed by the SIFN from payroll contributions. There are also various allowances for families with children and working mothers (discussed above). 6.32 Since July 1994, the various allowances for mothers can be summarized as follows. There is a maternity grant (i.e. a one-time payment set at twice the minimum wage) paid to all mothers financed out of the SIFN. The maternity allowance is 100% of the mother's wage, regardless of length of service.63 Allowance payments begin after thirty weeks of pregnancy, and normally continue for up to 126 days. There is a complex set of rules about duration of payments for pregnancies with complications and multiple births. All working mothers are entitled to up to three years leave without pay. All women caring for children under two years of age receive a monthly benefit equivalent to 20% of the minimum wage. 6.33 Maternity and family benefits from different sources have been administered at the enterprise level. Although this may have worked well under central planning, the system is becoming less appropriate. Benefits administration is a complex and time-consuming task for the enterprise (the arguments of paragraph 6.26 apply again here). 6.34 Streamlining the system to permit greater transparency and administrative ease will be necessary to ensure fiscal affordability, as well as safeguard the employment opportunities of 63/ This is more generous than maternity benefits in western countries - which are usually set at 50-85% of the mother's wage - but is similar to the approach in many Latin American countries (Sipos, 1993) 84  women with children. Financing allowances through several different agencies, without a clear accounting of costs, was viable in a centrally planned economy in which social costs were spread out among different entities. In profit-oriented firms, however, management may have incentives to hire persons for whom concessions do not apply. Employers may see all women as potential caretakers of children, the sick, and the elderly, in view of the current division of labor in the household. Women may also be offered lower salaries for the same work to compensate for perceived increases in the cost of female labor (although this is a dubious distinction - the social insurance deduction is levied on all employees). In this way, the concessions to women are transformed into obstacles to women's employment. Summary of Recommendations on Maternity Benefits: * Reduce the current level of maternity benefits, in the light of fiscal constraints, and possible negative welfare effects on women of an overly generous system, in terms of hiring and firing decisions of enterprises. * Shift the administration of maternity benefits from enterprises to local offices of social protection, while ensuring that those who are due payment of maternity benefits are paid them by the responsible agency. Privileges 6.35 The concept of "privileges" has played an integral role in the system of social assistance in Uzbekistan. Privileges, in cash and in-kind, are given to certain population groups, and administered by different departments and financed from different sources, including enterprises. Entitlement to privileges does not depend upon the income of the recipient. 6.36 The term privileges covers a range of benefits and services. It includes residential and in-home care for disadvantaged groups and assistance for the disabled. At mid-1993 prices, expenditure on privileges in 1993 totalled around R.26 billion. 6.37 Permanent care is extended to such groups as mentally handicapped children, the disabled and single elderly people through a network of special state institutions which provide material support, as well as medical services. There are 32 boarding homes in Uzbekistan, of which 25 are for the mentally ill, catering for about 7,500 people, and 7 retirement homes for about 1,100 elderly. These institutions are organized by the MSP, and financed out of the republican and local budgets. There are no private boarding homes. 6.38 Since 1985, assistance to single elderly persons and invalids who are unable to care for themselves have been given increasing significance. About 20,000 people are currently embraced by these daily services, and the 1993 estimated cost of provision is R.262 million. 85  6.39 A traditional type of social assistance is the manufacture and provision of protheses, financed from the budget. About 46,500 people apply for assistance with protheses and orthopedic articles each year, which are provided free of charge. Targeting Options 6.40 The Government is aware of the deficiencies in the approach to social assistance inherited at independence, and attempts have begun to meet the need for targeted social assistance. Development of social assistance targeted to people in need was expressed as a goal in its 1994 economic reform agenda, even though reforms to date do not appear to have achieved this objective. This is especially important in the context of reforms to universal consumer subsidies that will involve large increases in the prices of basic goods, and require compensation to protect the poor. Social assistance cannot, however, prevent a continuing fall in average living standards, at least in the short term. 6.41 There are three ministries directly relevant to the development of social assistance benefits -- the MOL and MSP, as well as the MOF. The MOL has been considering the implications of introducing an income-tested benefit that would be available to all, regardless of age or circumstances. The MSP sees social assistance as an area for policy formulation properly done by the MOL. The MOL accept the policy lead but sees this as less urgent, longer term policy development. Although current proposals are at an early stage, a considerable amount of work has been done to identify the implications and potential problems raised by such a benefit. 6.42 Administration of social assistance benefits in a market economy is a problem that has not yet been addressed in any systematic way. The Government has assumed that enterprises will continue their role of performing the administration of all benefits to people in work. This will not be the case for a large number of the claimants to social assistance, who are likely to be unemployed, or have inadequate work history. Even for potential beneficiaries who are working, it is likely that the enterprises will seek to reduce substantially their welfare administration function as privatization progresses. Finally, the reliance on the enterprises for administration of any benefit will leave one company towns, for example, in great difficulty if and when large enterprises restructure or close. The structure of local social assistance offices needs to be strengthened, and appropriate staff training programs developed. 6.43 Types of targeting mechanisms may be usefully distinguished as follows: those that rely on the assessment of individual applicants or households; those that rely on some categorical basis for eligibility (e.g. the presence of children); and those that rely on self-targeting (e.g. soup kitchens). To this list may be added the universal provision of benefits, which "targets" the entire population (see Table 6.2). The various instruments are not mutually exclusive and combinations of approaches, if well coordinated, can be effective. Whatever methods are chosen, there is a need for periodic reassessment. Issues relating to different methods are briefly outlined below. Details of international experience can be found in Annex 2. 86  Table 6.2 A Taxonomy of Targeting Mechanisms Individual Assessment Categorical Self-Targeting Universal Provision means-testing by oblast/raion temporary primary health care employment schemes primary education proxy means test students inferior goods social worker evaluation pregnant women nutritional status Source: World Bank 1992 6.44 Means-testing potentially allows for more exact targeting of the poor. In principle, it can provide "perfect" targeting i.e. assisting each of the poor with that amount of money required to bring them up to the poverty line. A central question is how to calculate incomes to determine eligibility. If the purpose is to limit the total benefit expenditure, then all or most income should be included. If the objective is to encourage individuals to engage in part-time work and become - as far as possible - self-supporting, then part of earning should be disregarded. 6.45 Some forms of income are indirect (e.g. the benefit of owning a land plot or a cow) and may not have a direct monetary value. There are two ways it can be dealt with; either by assuming that everyone has access to the same resource, or by identifying those people that have access, and attributing an income value to it. Problems could arise also in relation to the valuation of savings once inflation stabilizes. The alternatives are to ignore savings altogether, ignore savings below a threshold level, or regard them as a resource that has to be exhausted before benefit entitlement arises. 6.46 An important factor in considering alternative targeting options is administrative costs. Individual assessment mechanisms are more expensive to implement than self-targeting.'4 Mean- testing of income is generally more administratively demanding and therefore more expensive than categorical indicators (though these costs may be reduced where - as is the case with the pilot scheme of targeted social assistance to low income families - the knowledge of local communities is used to identify vulnerable groups). The costs of targeting options have to be weighed against associated expenditure savings. 64/ World Bank 1992 87  6.47 The main options for targeting assistance when household and individual incomes are unknown or partially known are categorical targeting and self-selection. The success of categorical targeting depends on the degree of link between low incomes/poverty and some observable characteristic(s), which are difficult to hide or alter. Where there is a strong correlation, categorical targeting can be very effective e.g. where poverty has a high regional concentration (e.g. remote mountainous regions of Uzbekistan), or the poor are concentrated in large families. However, where the degree of correlation is low, or people are able to assume the relevant characteristic easily, categorical approaches are less useful. It is useful to distinguish geographic targeting from other categorical methods e.g. targeting by occupation, age, school attendance or gender. 6.48 A general shortcoming of categorical targeting is that individuals who are poor may not fall within the defined categories. This is especially important in countries where the profile of poverty is changing rapidly. Where this problem arises, health and education officials or local communities may help to ensure that poor individuals who do not fit within the relevant categories are included within the coverage of the system. 6.49 The success of self-selection depends on the uptake of benefits being only by those with sufficiently low opportunity cost of their time, demand for low quality goods or services, or greater willingness to endure social stigma. In this way, some informational problems of identifying low-income households are lessened. For such schemes to be successful, their existence must be well-publicized among target groups. Self-targeting will be less successful as the benefit size increases. Self-selection may operate in a variety of ways: * subsidies may be targeted to goods consumed disproportionately by the poor (sometimes known as "inferior goods"). * subsidized public works schemes may set wages at such a level that only those with sufficiently low opportunity cost and limited alternatives will be willing to work. * the social stigma attached to being identified by other members of the community as a welfare recipient can contribute to self-selection. * the level of service may be such that the poor are the only group willing to tolerate queues, lower quality etc. Those able to afford it opt for private sector access e.g. commodities in states stores. Choice of Targeting Mechanism 6.50 Critical in the choice of targeting mechanism are administrative feasibility and implementation costs. Individual assessment programs generally involve higher administrative costs than other methods. At present in Uzbekistan, these cost implications are being ignored, by assuming that enterprises will administer mean-testing with no budgetary costs. An alternative approach (relied upon in the recent pilot scheme) uses local communities to assess 88  the poor in their areas. This involves low implementation costs for targeting, but fails to provide clear criteria for allocation of social assistance. 6.51 Even where individual assessment schemes are fiscally feasible, there may be underdeveloped administrative capacity to implement them. If the Government were to assume responsibility for this, in addition to the already heavy demands on social protection staff, this may place excessive demands on the system in the short term. This burden is partly lessened by the possible economies of scale in administration, and sharing of information among those dealing with different benefits. 6.52 Given the currently compressed income distribution, means-testing will often be difficult as large numbers of the near-poor are close to the poverty line. This exacerbates the problem of designing targeting mechanisms which protect the poor, but do not provide substantial work disincentives to the near-poor. Nevertheless, the Government can minimize the extent of unintended leakage through designing programs which are as simple and flexible as possible. Clear rules and guidelines should limit discretion at the field office worker level. It is important to ensure that there are adequate staff and appropriate training. Summary of Recommendations on targeting: 3 Targeting of social assistance will be necessary, in the attempt to satisfy social welfare and fiscal objectives simultaneously. - In the short term, a combination of categorical and self-targeting mechanisms would be the most appropriate for Uzbekistan to supplement the introduction of means-testing. In the medium to long term, the Government could consider a general social assistance benefit - as fiscal constraints ease - based on means-testing and administrative capacity to manage such a system develops. * Whatever method(s) of targeting benefits are preferred, the knowledge of local education, health, and community officials should be used as much as possible, to identify vulnerable individuals and groups in each area. 89  CHAPTER 7 HEALTH 7.1 Under the Soviet regime, Uzbekistan had a health care system that delivered free universal coverage, with good access in even the poorer and more remote regions of the country. The health status of the population is similar, in many ways, to that of other middle-income countries: moderate levels of child and adult mortality, with a mixed epidemiological profile, combining infectious diseases with noncommunicable diseases. However, health indicators could be much better, given widespread access and availability of human and material resources for health. Substantial morbidity and premature mortality could be reduced with a more efficient use of the available resources. 7.2 The quality and efficiency in the health system - in terms of personnel, equipment and infrastructure - could be improved. The Government has recognized these problems and is seeking to address them. A major challenge is how to maintain an adequate system of health care in the current fiscal crisis by improving the efficiency with which inputs are used. While the population has traditionally regarded free health care as a right, there will need to be changes to many aspects of health care financing and management that will affect the range of services that can be offered to all. 7.3 In the medium term the role of the private sector could expand in the provision of care, inputs to the system, and health insurance, although private provision is currently limited in scale. A basic package of health care should continue to be universally available through the public system, while charging or leaving to private financing other services. Growth of the private sector will require an enabling regulatory framework at the national and local levels. 7.4 The Government has recognized the need to improve the efficiency of the health system, and responded through legislative initiatives designed to address issues of financing and delivery, in particular, the draft Health Law which will allow greater diversity in financing and provision of health care. Plans for a health insurance scheme are being developed to improve the financial base of the health system. Significant restructuring has begun, including reductions in the number of hospital beds, but more is required to rationalize the inherited system. Health Status The Burden of Disease 7.5 During the 1970s and early 1980s, Uzbekistan's health indicators were good relative to its per capita income. Given the level of women's education and the share of GDP directed to health, however, health indicators could, in many instances, have been expected to be better. 90  7.6 The patterns of disease in Uzbekistan are typical of many lower-middle and low income developing countries. The epidemiological profile reveals a double burden of disease. Infectious diseases, malnutrition and reproductive health problems are juxtaposed with high rates of morbidity and mortality due to noncommunicable diseases and injuries. Table 7.1 Selected Demographic and Health Statistics Comparison of Uzbekistan and Selected Countfies (1993 unless indicated) Indicator Uzbekistan Russia Turkey Thailand Lower Middle- High middle- income income income Birth rate (per 30.9 9.4 28 20 28 25 13 1000) (1992) (1992) Life 68.3 66.5 67 69 67 68 77 expectancy at (1992) (1992) birth (years) Infant 38.7 19.9 54 26 42 38 8 mortality rate (1992) (1992) (per 1000 live births)* Matemal 42.5 52 37 146 lit 107 mortality rate (1988) (1988) (1988) (1988) (per 100,000 live births) Population 295 256.4 1960 4360 2850 2060 420 per physician (1990) (1990) (1990) (1990) (1990) Per nurse 91 74 1030 960 988 150 150 (1984-89) (1990) (1984-89) (1984) (1984) Source: World Development Report, various years * IMR figure for Uzbekistan adjusted upward by 21 % for comparison by WHO definition. 7.7 Mortality data enables estimation of the number of potential years of life (PYL) lost to premature mortality for seven age groups, 100 diseases and both sexes in 1990. PYLs were estimated with the same methods used to calculate Disability Adjusted Life Years (DALYs) in the World Development Report 1993.65 7.8 A total of 2.2 million PYL were lost in 1990 to premature mortality, 58 percent among men and 42 percent in women. The rate per 1,000 population is 103, approximately the same as that of CEE countries, and 20 percent lower than Latin America. The similarity between 65/ Methods and sources of information used for these calculations are described Annex 4, based on the 1993 World Development Report (World Bank) and in a background paper (Murray and Qiao 1994). 91  Uzbekistan and the CEE can be explained by the higher levels of adult mortality in the CEE, that offset the higher rates of child mortality in Uzbekistan. 7.9 The age distribution of the PYL lost to premature mortality is concentrated among children under five, with 52 percent of the total PYL lost. Adults (15 - 59) bear the second largest burden with about 28 percent of the total DALYs lost. Young adult men lost twice as many PYL as young adult women because the higher rates of mortality due to road traffic accidents and suicide. The age structure of mortality is very similar to that of low-middle income countries. Table 7.2 Morbidity: Annual Prevalence of Diseases Registered at Health Delivery Facilities (1993) (% of morbidity) Age Groupings Diseases Age 0-14(1993) Age 15-19 (1993) Age 19+ Respiratory system 42.4 26.2 21.0 Iniectious andl parasitic 6.4 3.2 3.0 I)igestive system 8.6 16.4 13.8 Injury and poisonings 5.5 6.3 5.5 Skin and subcutaneous tissue 5.2 5.9 4.0 Nervous system disorders 6.5 9.2 8.9 Blood and blood forming organs 7.7 8.6 7.7 Inldocrine atid metabolic 5.4 2.7 2.0 Geniitouriniary system 1.4 3.5 6.5 Miusculoskeletal system 0.7 1.3 2.5 Circulatory system 0.6 3.2 8.5 Comutplicationis of pregnancy - 0.01 3.6 Congeniital anomilalies 0.7 0.4 0.1 Menital disorders 0.9 3.6 0.8 Neoplasimis 0.1 0.1 1.4 Otiler 7.9 9.4 10.7 Source: Ilealtlh Care in the Republic of Uzbekistan, Department of Health Statistics, Statistics Office, Ministry of Health, 1992. 7.10 Almost half of the PYL lost follow infectious diseases, malnutrition or reproductive health problems, about 40 percent are due to noncommunicable diseases and 10 percent to injuries. For children under five, 80 percent of their PYL are due to infectious diseases and perinatal problems, mainly associated with birth trauma. About 45 percent of all the PYL are due to respiratory infections in this age group. Diarrheal diseases contribute to about 10 percent. For these clusters of causes there could often be cost-effective interventions. 7.11 Children (5 - 14 years) have the lowest share of PYL. Boys lose 1.6 more PYLs than girls, and 44 percent of their PYL lost are due to injuries, as compared with 28 percent among girls. Most of the gender difference is attributable to road traffic accidents. Seven percent of the 92  PYL are lost in both sexes to hepatitis, probably reflecting poor sanitary conditions. Respiratory infections are also an important cause of death in this age group, particularly in girls. These causes also have cost-effective interventions. 7.12 Causes of adult mortality show a wider dispersion, greater differences by sex than children, and are associated with interventions of less favorable cost and effectiveness. Men aged 15 to 29 lose almost three times more PYL than women of the same age. About 60 percent of the PYL lost in young men are due to injuries (mainly road traffic accidents and suicide), compared to only 23% for women. The main causes of death in young women are associated with infections: tuberculosis, hepatitis, respiratory infections, rheumatic cardiopathy, and nephritis. These causes explain about a quarter of the PYL lost in this age group and, like problems associated with pregnancy and childbirth, can be controlled through cost-effective interventions. 7.13 With increasing age the PYL lost tend to be for noncommunicable diseases, mainly cardiovascular disease and cancer. Tuberculosis is an important cause of death in adults under 70 years old. Cancer of the stomach and esophagus affect both sexes; cancer of the breast is about three times more common than cancer of the cervix among women; while cancer of the bronchus and lung is largely concentrated among males. The most common diseases among adults are ischemic heart disease and cerebro-vascular disease, explaining 14 to 70 percent of the PYL lost, depending on the age group. There are cost effective interventions to limit tuberculosis (chemotherapy), ischemic heart disease (anti-smoking campaigns and programs to change diets), and cancer of the lung (anti-smoking). Infant Mortality 7.14 Infant mortality is a serious cause for concern. The infant mortality rate (IMR) declined to a low of around 40 per thousand live births in 1990.i Since then, however, the corrected rate rose again to around 45 per thousand live births, followed by a decline in 1993 to 38.7 (see Table 7.1). The corrected rate is about 20% above the weighted average for countries of similar (lower middle) income, and is higher than many other republics of the FSU. 7.15 The main causes of infant death are respiratory infections (pneumonia), perinatal conditions and infectious and parasitic diseases. Deaths from respiratory infection have increased, while deaths from infectious and parasitic diseases and perinatal conditions have declined (see Table 7.3). Respiratory, infectious and parasitic diseases are also the main causes of morbidity arnong older children. 7.16 There are significant regional variations in both the IMR and the causes of death. In Tashkent City, the IMR was around 33 per 1,000 live births in 1992, while in Karakalpakstan 66/ All IMR firiires are cvttectd lor a 21 ' unde t I Uerurrtr I1 II tr wl.l trours oft the tUzhekistan mitiorities, due to the differences of the SoViet defti r Ii . tl e 1n t e1rniterall.lv r ptcplcd WH1 detilnitinlr. T1he Nl101 tigures are thus 34.6 in 1990, and 37.0 in 1992. 93  it reached about 60 per 1,000 live births.67 Higher rural mortality is mainly due to infectious diseases. Diarrhea is the most common infectious disease causing infant death and exhibits both urban-rural, and seasonal variation. The IMR is also higher for ethnic Uzbeks than Russians. 7.17 There is a need to promote breastfeeding, to ensure adequate levels of infant nutrient intake. Currently, the Government estimates that only 25% of demand for baby foods is being met. In 1993, a drive was launched to encourage both a higher incidence and longer period of breast feeding, which could help to lower the incidence of diarrhea caused by the unhygienic preparation of infant formula. 7.18 Vaccine-preventable diseases experienced a significant long run decline in Uzbekistan, though this appears to have halted or even reversed in the last three years. Since 1990, the coverage rate for diphtheria, pertussis, polio and measles has declined, as vaccine shortages have reduced outreach. 7.19 About 98% of vaccine needs are imported. Previous attempts to develop local vaccines failed to meet Union standards. Since 1993, partial modernization of facilities in Tashkent has allowed production of some BCG vaccines. In 1992, no vaccines were purchased from abroad, although UNICEF and USAID supplies of measles vaccine helped to lessen the supply shortfall. Two million children were not reached, despite the aid. In 1993, the government estimates that only 1/2 of the country's requirements for BCG, poliomyelitis and diphtheria (DPT) was met. The cold chain has broken down in many rural areas, exacerbating the supply problem by creating a high wastage rate. Much of the refrigeration equipment currently in use is old and there are shortages of materials for administering immunization, mainly syringes and needles. Maintaining the cold chain, particularly in rural areas, should be a priority. Adult Mortality 7.20 Adult mortality (15 - 59 years) shows an unusually high variation between men and women by international standards, though the differentials are typical of many former Soviet republics. The male rate is typical for countries at similar income levels, while that for women is about 25% below the weighted average. Infectious diseases have largely been eliminated as an adult cause of death, but the men have unusually high mortality from cardiovascular disease and injuries. Women's Health 7.21 Maternal mortality rates have declined steadily, with regional variations. In 1991, the rate was 65.3 per 100,000 live births, and declined to 42.5 per 100,000 in 1993 (see Table 7.1). The level of maternal mortality is substantially lower in Uzbekistan than the average level for 67! Official 1992 figures on which the corrected figures are based werc 27.0 per 100 live births ior Iashkent city, and 49.1 for Karakalpakstan. 94  low-middle income countries. Tashkent City has a higher mortality rate, largely due to the referral of complicated cases to the capital when it is already too late to save the mother.68 Table 7.3 Major Causes of Infant Mortality in Uzbekistan (in percent of total infant mortality) Causes 1982 1986 1989 1990 1991 1992 1993 Acute respiratory infections 44.9 47.1 47.0 44.6 45.0 45.6 48.7 including pneumonia Intectious & parasitic 13.7 20.8 16.5 14.2 15.1 17.1 14.5 diseases including diarrhoea Coingeniital abnormalities 4.2 6.1 5.2 5.9 5.6 4.3 4.4 Periiiatal conditions 15.2. 20.0 22.6 25.4 27.5 24.2 22.7 Others including accidents 8.0 6.0 7.7 7.4 8.4 8.8 7.7 & poisonings Source: MOI1. "Health Protection in the Republic of Uzbekistan: Statistical Yearbook" 1992 *First nine months only 7.22 Uzbek women's health is adversely affected by the frequency of child-bearing. Large families are common, with each woman having an average of four children, and over 200,000 women having ten children or more. Associated health problems are increased by the short spacing of births, with only 18% of women having more than two years between deliveries. Given the high level of formal female education (over 80% having six years or more of schooling), the fertility rate would be expected to be about half this level. There are significant ethnic variations in the number of children per woman, with ethnic Russians having an average of only 1.94 children, less than the half that of Uzbek women and similar to the average for Russia. Family Planning 7.23 Family planning has traditionally been confined to induced abortions, though reliable data for Central Asia are limited. MOH sources indicate that there were 100,000 abortions in 1994, around 15% of the 660,000 live births. 7.24 In recent years, contraceptive use has increased, largely due to an IUD program, which has inserted 2 million devices, though improper insertion has caused difficulties. Use of oral contraceptives and condoms is very low. The official contraceptive usage rate in 1993 was 34%, if only women 16 to 50 years old are counted as potential contraceptive users. The estimate for 68/ UNICEF 1992 95  1994 is 45%, and the Government's aim is 70% contraceptive coverage by 1997. These figures show a significant rise from a rate of around 10% in 1990. 7.25 Cultural and religious factors undoubtedly play a part, reflected in the higher rates of contraceptive use by ethnic Russians. Recent government initiatives to promote family planning - for example, expanded educational programs since 1991 - are to be welcomed. In 1993, a campaign (the "Healthy Generation" program) was launched to improve mother and child health, including family contraceptive counselling.69 A positive aspect of existing cultural attitudes in Central Asia generally is the very low reported incidence of sexually transmitted diseases, though this may also be due to misreporting. Nutrition 7.26 Since 1991, there has been a marked shift in consumption away from meat and vegetables towards bread, in response to changes in relative prices and inflation, and reductions in imports of food from FSU republics. Deficiencies of micronutrients such as Vitamin A and iron may follow if this pattern of consumption continues.70 The fall in budget expenditure on nutrition programs - from 11% of the health budget in 1991 to 4.7 % in 1993 - should be reviewed by the Government to find to what extent the cut is a response to more efficient nutritional targeting and/or reallocation of resources to other urgent needs of the health service. 7.27 Caloric-protein undernutrition in children is often cited as a health priority. However, indirect evidence suggests that the problem may not be highly prevalent. The mortality rate due to diarrheal diseases is low, explaining less than 15 percent of the total deaths among under five year olds, and mortality between one and four years of age is also low. Protein caloric malnutrition in pregnant women is unlikely to be a serious problem. The incidence of low birth weight rate is below seven percent in all oblasts, suggesting reasonable weight gain during pregnancy, and probably adequate weight at the beginning of pregnancy. Nonetheless, monitoring of the nutritional status of children is important, as the situation could worsen. 7.28 The incidence of anemia among women and children is a possible indicator of nutritional status. The MOH estimates that around 80% of pregnant women in Uzbekistan are anemic." A recent study of a representative sample in Karakalpakstan found that about 52% of women of childbearing age, and about 80% of children aged between 1-3 were anemic.72 As this is the poorest region of the country, this would represent the likely upper limit. However, anemia is a significant problem for women, and even greater danger to children. 69/ Family planning is an area which has also attracted donor support - from USAID and others - in the design and implementation of promotional programs. 70/ There is no information currently on vitamin A or iodine deficiency in the country, and no reliable evidence of malnutrition. 71/ However, the definition of anemia used was not consistent in all cases. 72/ Morse, C. 7he Prevalence and Causes of Anemia in Muynak District, Karalppakaistan Crosslink International, November 1994. 96  Risk factors 7.29 Among the wide range of risk factors prevalent in Uzbekistan, of particular relevance are high rates of fertility, inadequate supply of water and sanitation, smoking and alcohol abuse, and poor diet (though some dietary risk factors have become less significant in the wake of food price liberalization). 7.30 High rates offertility. The structure and dynamics of the population in Uzbekistan has a profound impact on the quantity and nature of the burden of disease. About 44 percent of the 21.7 million (1993) inhabitants of Uzbekistan are children under the age of 15. The young structure of the population is due to the low mortality and high fertility prevailing for almost three decades in the country. The average fertility rate is high: four children per woman of reproductive age. The annual population growth rate has remained high for the past three decades. 7.31 Given the high level of women's formal education (more than 80 percent have at least six years of schooling) the fertility rate would be expected to be at least half of the current level. This trend is similar to that among ethnic minorities with strong religious beliefs in Canada, USA and Western Europe. Demographers have suggested that the Islamic culture of the ethnic Uzbek may explain the high fertility levels. This is supported by the significant fertility differentials between ethnic groups and the negligible differentials between rural and urban areas. Russians in Uzbekistan have an average fertility rate of 2.0, about a third of the level found in the ethnic Uzbek population. Comparison of fertility rates of the same ethnic groups in other Central Asian countries reflects similar patterns. 7.32 Abortion is readily available, but women resort to it less frequently than elsewhere in the FSU where the demographic transition has led to a substantial decline in fertility. Traditional methods of contraception, intra-uterine devices (IUDs) and abortion are more frequently used by Russians in Uzbekistan than by Asian ethnic groups, but the overall availability is very limited. There is evidence to suggest that traditional and some modern methods of contraception are generally unacceptable for the ethnic Uzbek population. IUDs and abortion seem to be the preferred methods when women and their families decide to space births or limit fertility. The burden of disease due to abortion complications in Uzbekistan is negligible even after allowing for 100 percent under-reporting. 7.33 Water. Access to piped water exceeds 84% in urban areas, but is only an average of 49% in rural areas. These rates are similar to developing country averages of 81 % and 50% respectively. Among rural oblasts in Uzbekistan there is substantial variation in access rates, ranging from only 9.5% in Karakalpakstan to 90.7 % in Syr Darya (see Table 7.4). Although urban water consumption levels are considerably higher - e.g. 750 liters per capita per day in Tashkent City compared to only 10.4 liters per capita per day in Bukhara oblast in 1993 - part of the difference appears to be due to wastage from the piped water system. 7.34 Poor water quality contributes to health problems, particularly in rural areas. Currently 36% and 14% of water falls below quality standards for chemical and bacteriological 97  contamination respectively, a significant deterioration since 1988. The causes vary by region, but generally include pollution from industry and agriculture, and lack of chlorine, sanitary zones and filtration equipment.73 Environmental decrees are not enforced. Although only 230 of 8,000 industrial enterprises are classified as non-polluters, prosecutions are rare. Official figures for 1991 show discharges of 277 million cubic meters of sewage and industrial waste into surface reservoirs, of which with 81 % was untreated sewage. There remains a problem of agency coordination, as several Ministries are responsible for the provision of water for consumption. 7.35 Sanitation. Lack of access to safe sanitation and the poor quality of existing facilities contribute to the high levels of diarrhea, hepatitis and gastro-intestinal disorders. Regional disparities in access are again apparent, with urban areas having an average 46.3 % coverage rate and rural areas less than 5 %. No government body has overall responsibility for rural sanitation. Of 123 cities and towns, only 53 have sewerage systems. 7.36 Even for those areas with sanitation facilities, there is a problem with quality. A 1992 UNICEF mission found all the facilities visited to have inadequate standards of hygiene. This is partly because the rates charged for sewerage treatment are significantly lower than the costs of processing. 7.37 Air Pollution. While the causes of external air pollution are largely outside the mandate of the health care system, the negative effects of household pollution (e.g. from using coal as fuel) can be addressed more directly by the public health service, through basic health education in choice of source of fuel, pricing policies and/or promoting better safeguards in its use. 7.38 Pollutants could contribute to the high incidence of respiratory infection. They are produced mainly by automobiles and industry, though environmental degradation in some areas is also a factor. Estimates of the total emissions of pollutants in 1991 range to 2.5 million tones to 2.6 million tons for motor cars alone. The main pollutants are carbon monoxide, nitrogen oxides, sulphur dioxide, lead and aerosolized particles from the construction industry. Leaded and diesel fuel contribute to current levels. 7.39 Smoking and Alcohol Abuse. Smoking and - amongst the elderly - nasvae (holding tobacco under the tongue) are very prevalent in Uzbekistan. Cigarettes and locally produced vodka are cheap. Excise tax is low. MOH surveys undertaken in 1987 found that about half adult males smoke or use tobacco. Russians in Uzbekistan smoke more than ethnic Uzbeks. Alcohol abuse is probably a problem, although there are no data to substantiate its magnitude. Information on the harmful effects of tobacco and alcohol was traditionally limited, but is increasing. Official sources note that tobacco and alcohol consumption have declined in recent years, in response to government information campaigns and rising prices. 7.40 Diet. Animal fat has traditionally been a basic part of the daily Uzbek diet, at least in urban areas, and when available, in rural areas. Its relationship with cardiovascular disease is 73/ While there is substantial anecdotal evidence of the harmful health effects of cotton pesticides, data is currently unavailable. 98  well established. Tradition and taste for animal fat has been reinforced for decades by government policies that encourage the consumption of animal products. Since 1992 however, there has been a significant reduction in animal fat consumption in many areas, largely in response to rising fat prices. This has encouraged greater use of vegetable - particularly soya - oil. In addition to price effects, carefully designed information and education programs are needed to modify this life style. For diet and related health problems, a comprehensive effort is needed to promote preventative behavior through choice as well as necessity. 7.41 Aral Sea Problems. Rural and remote areas in Table 7.4 Uzbekistan generally suffer Rural Population Access to Drinking Water worse health indicators Regions/Districts % of Population Supply Per Capita than urban areas. People Covered per day (liters) in the Aral Sea basin have Andizhan 70.0 47.6 further problems Bukhara 21.1 10.4 apparently related to the Dzhizak 68.4 113.4 shrinkage of the sea. This Kashkadarya 36.0 41.5 has several adverse health Karakalpakstan Republic 9.5 7.5 has several adverse ~Navoi 22.4 14.9 side effects. Increased Namangan 62.1 64.4 salinity and erosion of Samarkand 52.0 56.6 exposed land has increased Syr Darya 90.7 52.3 Surkhandarya 53.1 101.9 incidence of dust and sand Tashkent 59.7 52.2 storms, insufficient and Fergana 60.0 55.8 salinized water supply, and Khorezm 19.2 20.7 higher bacteriological National average 48.8 48.3 levels in the water, Source: Sanitation and Epidemiological Department exacerbating the pre-existing inadequacies of the water supply. Intensive use of agrichemicals has led to further deterioration in the quality of water, air, food and mothers' milk. The exposure of pregnant women to butifos defoliant used in the cotton fields may to contribute to high rates of infant mortality and congenital defects. 7.42 In August 1992, the Aral Sea Basin republics set out measures for cooperation to address some of the problems of the region. The agreement is a positive step. The World Bank is currently involved in identifying projects relating to stabilization of the water level, development of a water resources management strategy and institutional capability, and rehabilitation of the Aral Sea Disaster Zone, and drinking water and sanitation projects. Health Care Provision and Financing 7.43 The transition presents new difficulties for the system of health care provision, in the context of severe fiscal constraints. Two central elements of the evolving health strategy of the Government to date have been increasing decentralization, and a shift towards providing a greater proportion of basic care at the lower levels of the system. There needs to be a 99  reassessment of the organization, financing and basic goals of the public health system inherited from the former Soviet Union. Strengthening primary health care will require a reallocation of existing budget resources directed to health, as well as revised pricing policy for certain services. Infrastructure and Personnel 7.44 Levels of health infrastructure and personnel in Uzbekistan amongst the highest in the world (see Table 7.5). There were 1,370 medical institutions in 1992, with each oblast serviced by a large hospital and a number of district and specialist hospitals (e.g. children's and cardiovascular). In 1993 there were 205,800 beds, or just over 9 beds per thousand population, a significant fall from 251,789 beds (just over 12 beds per thousand) in 1990. This is more than twice the average middle income country, following the former Soviet method of funding for health care, which encouraged high numbers of beds and health care providers. The Government's objective is to reduce beds to around 8 beds per thousand people. At the lower levels of the system are local health clinics and a well developed feldsher (community health worker) system.74 7.45 Both the number of doctors and the number of nurses almost Table 7.5 doubled between 1980 and 1993 Health Infrastructure in Uzbekistan, 1993 (Table 7.6). In 1993, there were Level Numher 73,500 physicians and 240,000 nurses in the country, at ratios of Central hospitals 5 Training Inst. hospitals 7 3.4 per thousand and 11.2 per Regional hospitals 14 thousand population respectively. Urban hospitals 142 Most (50%) of physicians are District hospitals 189 general practitioners, pediatricians Rural hospitals 451 Stationary dispensaries 180 or surgeons. Traditionally, the low Maternity houses 55 quality of training, supervision Regional children's hospitals 12 and wages has meant that Children's hospitals 42 standards were sometimes Other specialized hospitals 290 Ambulatory polyclinics incl. rural polyclinics 3021 relatively low, and that doctors Feldsher Posts 6645 were expected to perform many screening tasks normally performed by nurses in other countries. However, several of these deficiencies are being addressed in reforms to the system of medical education. 7.46 Clinical practices are sometimes outdated. Even within a medical specialty it is possible to find modern drugs and treatments applied for some diseases and interventions of dubious or poor effectiveness for others. This has been compounded by the financial crisis of the public 74/ Feldshers receive training which provides skills somewhere between the level of a doctor and a nurse. 100  health services that has lead to increasing shortages of essential drugs, medical equipment and the erosion of health personnel salaries. 7.47 Relatively large numbers of doctors and hospitals are associated with unnecessary hospitalizations and treatments. Excessive use of intramuscular and intravenous drug treatment, and inadequate use of antibiotics are two examples of resource waste. While there are some very good doctors and facilities, the overall efficiency of the system is low relative to other middle and high income countries. Health services in Uzbekistan could be maintained with less human and material resources, without affecting the quality of care. 7.48 The number of hospital beds and health centers increased in the 1980's, and early 1990s, then the number of hospital beds fell sharply after 1992. In addition, the average length of stay for acute patients has been reduced from a range of 12-25 days (1992) to an average of 14.5 in 1994. Even for diarrhoeal diseases and other infections in children the average length of stay exceeds 10 days. Middle income countries typically operate hospitals with length of stay below seven days. Table 7.6 presents trends for the most important facilities in the health system. 7.49 Recent reforms to the system of medical education have included a new curriculum for first year medical students, and lowering of the pupil-teacher ratio from 12-15:1 to 4-8:1 by restricting the level of admissions. At the same time, more training of other medical staff will free doctors from lower level tasks. Fewer doctors may also help to contain labor costs, which rose from 51% of the health budget in 1991, and 55% in 1993, despite falling real wages. Organization and Financing 7.50 In 1992, R.20.4 bill. was spent on health. This was just over 4.5% of GDP. In 1993, budgetary expenditures on health amounted to R.210 bill., or around 4.7% of GDP.75 Relative to the rest of the FSU - and countries at similar levels of income - the share of health expenditure in GDP remains high (see table 7.7). 7.51 Despite overall fiscal pressures, the Government maintains a commitment to free health care. However, even if inflation can be brought under control, the rise in the prices of imported inputs means that existing inefficiencies in the system must be eliminated, if standards are to be maintained. 7.52 Recent economic trends have affected the health sector budget. The breakdown of inter-republican trade agreements, and the gradual opening of the economy to the world market led to increases in the prices of imported inputs, such as drugs and medical equipment. Salary costs - which constitute the single largest expenditure in the health budget - are rising in relative terms. 751 The proportion of GDP is calculated using GDP figures of R.447 bill. for 1992, and R.4,428 bill. for 1993, from Uzbekistan Economic Memorandum: Subsidies and Transfers (Vol. 11), World Bank 1994. 101  7.53 In 1992 and 1993, the MOH operated on an Table 7.6 emergency budget, which Hluman and Material Resources for Health in Uzbekistan, 1980-93 is intended to cover the cost of salaries, food, Resources 1980 1990 1993 1993 medicines, and a small Doctors 43,533 69,809 71,131 73,500 number of other items. Paramedical personnel 124,444 213,667 234,002 240,0()0 Hlospitals 1,135 1,355 1,344 1,339 The central budget also hlospital beds 179,850 251,789 233.542 205,800 finances health care Polyclinics 2,159 3,093 2,929 3,021 establishments under Blood banks 22 25 25 25 Republican control, Drugstores 1,499 2,262 2,313 - including medical and Source: Healthl Caire in the Republic of Uzbekistan, Department of pharmacy education, and llealth Statistics, Ministry of Health, 1993. research institutes and their attached clinics. 7.54 The pattern of health financing is becoming increasingly decentralized. The central health budget was previously prepared by the MOH, but estimates for the oblast needs are presented separately to the Ministry of Finance. Beyond the state and MOH budget allocations, oblasts and raions generate their own funding. An estimated 30% of local expenditure goes to health, with oblast authorities approving local budgets. 7.55 Local funding has mainly been directed to the feldsher system and other health care facilities under the authority of the raion or oblast. Budgetary shortfalls have resulted in local authorities increasingly having to finance operating costs, including some pharmaceutical requirements. Most facilities are now within the control of oblast or raion authorities, though training of physicians, medical attendants and paramedical personnel is carried out under the republican MOH budget. Beyond the local budgetary allocation, facilities rely to a limited extent on user charges. Salaries and expenses of feldshers are financed by local soviets. The feldsher is professionally responsible to the raion medical services and materials are provided from its health facility stocks. 7.56 This basic administrative division of responsibilities is supplemented by several schemes for vulnerable groups, which the MOF funds directly. These include activities for the Aral Sea region, and nutritional supplements for infants and pregnant women.76 7.57 High rates of inflation exacerbated MOH difficulties in budgeting, forecasting expenditure and allocating funds adequate to meet the estimated needs of local authorities. Current budgeting is proceeding on the basis of a per capita figure of health care expenditure, adjusted for regional variations. This is preferable to the previous method of assessing the "normative" cost per hospital patient and determining local allocations on the basis of the number of hospital beds, which ignored efficiency and actual regional patterns of disease. 76/ Several of these programs were discussed above (see Chapter 4). 102  7.58 However, an affordable total health expenditure remains to Table 7.7 be determined. The existing Public Health Expenditures of Selected Countries, 1993 volume of public resources should % GDP GNP (US$) Per Capita be more effectively utilized. 1993 Moreover the formal budgeting Uzbekistan 4.7 300 system requires reform. The Kazakhstan 2.4 650 system of using local authority Indonesia 0.7 610 requests determines allocations Morocco 2.6 3500 independent of cost effectiveness Russia Federation 3.0 500 or patterns of disease, and weak Sri Lanka 1.5 institutional capacity is a problem. Source: WDR - 1993, 1994 7.59 Table 7.8 gives a breakdown of the health expenditures between 1991 and 1993. Salaries are the highest (and rising) cost of the system. Labor costs rose from 51 % to 55 % of the total health budget between 1991 and 1993. In contrast, spending on drugs and medical equipment fell from 14% to 7% over the same period. In terms of promoting preventive health, the absence of educational allocations within the health budget in both years is a significant failure of the budgetary process. 7.60 Financing of health care is also supported by grants from external donors, contributions from national and local level charities (such as the Red Crescent), credits and bank loans. Donor support has been critical in the area of drugs and vaccines. Exact figures are difficult to obtain, but an estimated $60 million has been provided since 1992 from 93 bilateral donors. In addition, the Government of Turkey has extended a loan credit of $30 million for purchase of drugs from Turkish companies. Reforming Health Care Delivery 7.61 The wide extent and impact of quality problems in the health system is recognized by most Ministry officials, health workers, and the public.77 The Government partly responded to these challenges with a draft Health Law in 1993. The areas of the health system that are in need of most urgent reform are outlined first, before analysis of the draft legislation. Restructuring of Services 7.62 High ratios of hospital beds and doctors to population encouraged both high hospitalization rates and long average inpatient stays. The MOH estimates that at least 35 % of admissions are medically unnecessary. Previous government policy of hospital bed expansion has shifted to a greater concern with improving the quality of existing facilities. Progressive 77/ Indirect evidence of the quality of care - due to what combination of low quality facilities and inadequate training is unclear - is provided by the case fatality rate of children with acute respiratory diseases and pneumonia, and the perinatal mortality rate, all of which are relatively high, despite universal access to health care. 103  reforms include increased emphasis on outpatient treatment - including day surgery for some conditions. Nationally, there has been a 25 % reduction in hospital beds since 1991, replaced by day beds at polyclinics, with substantial costs reductions. The Table 7.8 number of beds could be reduced Breakdown of Health Budget, 1991-93 (in percent) significantly, without s i g n i f i c n t I y , i t h1991 1992 1993 compromising health outcomes. To ensure that standards of Salary 41 44 40 treatment are maintained, Payroll tax (37%) 10 13 15 polyclinics need strengthening and Operating costs 7 7 15 adequate access to drugs. Education 0 0 Nutrition 1 1 11 14 Drugs 8 4 6 7.63 Greater reliance on Equipment 6 1 1 polyclinics is part of a wider drive Pillows, sheets, etc. 3 1 1 to spread treatment to lower levels Capital construction 6 3 4 of the system where medically and Capital repair 4 1 3 .. . . .~~~~~~~~~~~~~~~~~~Ti Other expenses . . ........3 141 administratively possible. This Ohr 100 10 1 would allow for a reduction in the 100 100 number of doctors to about 2/3 of Source: Ministry of Health current levels, with those remaining being better paid and better trained. An expanded role for the local feldsher system and greater reliance on child clinics and maternity hospitals is recommended. Drugs Policy 7.64 The Government formerly provided drugs free of charge at the point of delivery, and 76% of imports came from other Soviet republics. While some of these arrangements continue, most drugs must now be paid for in hard currency. Current MOH estimates suggest that publicly provided drugs cover only about 25-30% of actual needs. However, vulnerable groups need support even while prices fall short of full world prices, as the Government has acknowledged with a decree in 1992 to protect children, the disabled and other vulnerable groups. 7.65 The Government face a dilemma between continuation of free delivery and fiscal constraints. World prices are unaffordable for the vast majority of Uzbeks, but drugs must increasingly be purchased at international commercial cost. This has been partly addressed by reduction in the drug list for the country from 3,000 drugs down to around 400-500. The Government established a new parastatal in 1993, largely in response to drugs shortages, as a basis for joint ventures with foreign drug companies, for research and production of drugs and vaccines. 104  Summarv of recommendations on drugs * improving and standardizing inventory control and storage facilities, to ensure that drugs are not wasted through spoilage or theft. * increasing the short term aid component of drug supplies through consultation with UNICEF, WHO and other donors. * improving training of health personnel to emphasize appropriate prescription, and knowledge of the pharmacological properties of different drugs, and avoiding profit incentives for doctors to over-prescribe. * greater emphasis on preventative health education. This will require reconsideration of the current proportion (0%) of the health budget spent on education and/or introduction of health education into the school curriculum. Feldshers could have an important role in the process, as will the Ministry of Education and other line Ministries. * The participation of foreign joint venture partners in pharmaceutical production should be encouraged, provided that acceptable terms can be agreed upon. In the short and medium term, however, importing and/or packaging of most drugs appear the most feasible options. Financing 7.66 The objective of the Government is to expand general user charges in the current economic climate. It is necessary to identify a basic package of care which would continue to be provided free of charge to all, including immunization and maternity care. Beyond the basic package, charges could be introduced for discretionary services as the Government sees fit. The experience of other countries suggests that charging for services is a method of cost containment in public health systems, rather than a substantial source of revenue. 7.67 A number of services have long been classified as "paid", including dentistry, optical services, cosmetic procedures, and abortions. Proceeds from these payments remain at the health facility, representing around 2 % of total expenditures and do not fully cover costs. There appear also to be informal payments to providers of health care. The likelihood of such payments continuing after the introduction of charges would depend to an extent on whether the currently low salaries of health care providers were raised, in both the public and private sectors. 7.68 User charges could expand the resource base and increase efficiency. However, the challenge is to create incentives that encourage an adequate level of quality service, without overservicing or unaffordable prices. The negative experience of China, Japan and Korea with overprescription by doctors due to a poorly designed payments schedule is instructive. Just as importantly, there must be adequate provision for those unable to afford any level of charges for essential services. There is evidence from many developing countries that the introduction of 105  user fees - in the absence of an adequate system of social protection - has seriously and disproportionately affected the demand for primary health care amongst poorer sections of the population. Privatization in Health Care 7.69 The private sector has a potentially significant role in the provision and financing of health care. However, privatization per se cannot alleviate the crisis in the system in an equitable way. Privatization does not automatically reduce costs in the absence of competition; regulation of the pricing of private providers with local monopolies will be necessary. Assumption of a future regulatory role by the MOH will, in turn, require administrative flexibility, and training of staff. 7.70 A national legislative framework was put in place in 1991 and 1992 for the privatization of health services. Reform will be phased, as markets for private care and insurance develop. The degree and pace of privatization measures may vary by oblast and type of service, as increasing proportions of health care expenditures are funded locally. Obvious targets for initial privatization are the input factors of the health system, such as equipment and ancillary services. 7.71 In late 1993, the first stage of privatization was initiated and expected to cover pharmacies, optical shops, disinfection stations, scrap metal collection units, and auxiliary and subsidiary services of medical and prophylactic institutions, and is to be completed by 1995. By mid-1994, there were 360 private pharmacies, with plans to privatize all pharmacies by end 1994. The next stage would include medical and obstetrics posts, local health stations, aid posts, agencies and industrial enterprises, workshops, cosmetic and beauty clinics and other subsidiary health services. While most of these services are best provided by the private sector, it is not clear that some, such as obstetrics posts which are preventative in nature, should not be publicly financed. 7.72 Some private services have already emerged, including private clinics, medical practices and pharmacies, but the changes to date are modest. In late 1993, there were only 10 private pharmacies, though a 5 year program has been designed to expand this number. The MOH is to license and regulate all pharmnacies, maintain a list of approved drugs, and set price guidelines. The Association of Physicians of Uzbekistan endorses a licensing system for private clinics, to ensure that standards are maintained in privatized provision. 7.73 Partial privatization of feldsher services has begun and divestiture of other local facilities could progress relatively rapidly. The expected arrangement would be that basic services would be provided free of charge under a contract with the raion, and other services would be charged for at the point of delivery, or via insurance. Raion-level supervision of the prices charged for additional services is already in operation in a few pilot schemes. With both feldshers and other types of private provision, the relevant authority must ensure that the state system has the resources to maintain a basic level of quality services. 106  7.74 An important complementary aspect of privatization is health insurance provision, where the Government seeks to allow those who are able to pay voluntary contributions above a compulsory level paid out of wages. However, whether there is currently an adequate institutional framework for a market-oriented health insurance system, or whether the various levels of government have sufficient experience with regulation of private enterprise at this point to control costs effectively, is unclear. The Draft Health Law 7.75 During 1992, the Government prepared a draft Health Law, the first such legislation ever considered in Uzbekistan. It was discussed by the Supreme Soviet in early 1994. In many respects, it provides the framework for far-reaching and much needed reforms, and should be seen as an important first step in the evolution of a health care system which will meet the welfare needs and fiscal demands of Uzbekistan in coming years. The stated goal of the law is to provide a basic health package for all - particularly in rural areas - with a range of other services available for a fee. At the same time, several important aspects of health care reform are not addressed, or their operation is left unclear. 7.76 There is a plan to introduce health insurance to finance much of the health care system. This is a response to increased demands on the system and falling real allocations. It was suggested that this could involve a payroll tax on enterprises of 5% or more. This would increase current levels of payroll taxation to 45% or more, which is undesirably high. There are further critical issues which need to clarified before the system can be judged effective or not. It is unclear, for example, whether receipts from the payroll tax would stay at the local level, or be considered part of general revenue. 7.77 The intended public-private balance in the insurance system reflects reliance on insurance funds and companies, some of them public or quasi-public, and others private, but subject to heavy regulation. Funds would be raised through the payroll tax, and independent provider contracts for health services. The scheme involves a first tier of services, for which contributions are to be compulsory, and a smaller, voluntary component to cover additional services/amenities, such as private rooms. 7.78 For public insurance funds, responsibility for payroll tax collection requires clarification. It may be desirable that the proposed health contribution be collected by either the amalgamated Social Insurance Fund, or by the central tax authorities. In addition, the imposition of a new payroll tax raises familiar issues of balancing the need for financing social services, with the ability and willingness of enterprises to pay higher labor costs. Employees may be less willing to make a contribution from their wages, if they are already facing increasing costs for use of many services at the point of delivery. 7.79 It is generally considered appropriate to keep financing and delivery separate, to facilitate the provision of publicly financed services by private institutions. Over the longer term, it may also be necessary to regulate the range of investment activities which are considered appropriate for both private and public health insurance funds and companies. 107  7.80 Further clarification is needed in several respects, particularly regarding the level of competition between public and private insurers, the basis for reimbursing health care providers, the role and capacity of the financial system in handling new classes of transactions and the need for information systems to process large amounts of data. These are complex questions, for which there are no clear answers from international experience. Evidence from industrial countries suggests that the system for assessing the reimbursements for doctors and hospitals is an important factor in the overall levels of health care costs, (see Box 7.2). Development of new systems and institutional capacity in the market for health insurance is a potential area for external technical assistance. 7.81 The groups identified in the law as having special needs, and thus entitlement to a wider range of free services, is presently so large as to be unaffordable. At the same time, many of the categories - such as children, women, the aged, and invalids - clearly need access to basic services. A more effective method to balance welfare and fiscal objectives would be setting out those services which are used only - or disproportionately - by the target groups, so that the basic interventions that are sought to be assured are targeted and affordable. This avoids the position of providing non-essential services to people just because they fall within one of the target categories. 7.82 Under the new law, patients will no longer be restricted to one, or a small group, of health care providers. Potentially, this will increase the incentives for more efficient and service-oriented health care provision. The draft law allows private health practices, and charges or services. This has already begun occurring to a limited extent. However, there is not a well defined structure for regulating private provision of health care. Other innovations under the new law include a ban on tobacco and alcohol advertising, public information on the health risks of different activities and lifestyles, and increased regulatory responsibility on the MOH. Problems with the draft law 7.83 The law broadly provides that the state is responsible for providing medical care when people are sick. As the health budget comes under increasing pressure, such an approach is unrealistic, and perhaps counterproductive, as non-essential services may - in the absence of legislative guidance - continue to be provided at the expense of basic health interventions. A basic package of health interventions to be guaranteed by the state cannot be determined apriori, but must be based on a detailed assessment of expected health gains, costs, and resources. 7.84 The roles of some other agencies are not explicitly outlined in the legislation. Setting out these responsibilities would ensure that the MOH is not considered the residual provider of many services where the budgets of sectoral ministries are coming under increasing strain. In setting out the roles of the ministries, the responsibilities of the MOH itself could be expanded, to include publication on the burden of disease, testing of new drugs, and assessing the appropriateness of new health technology. 7.85 There has traditionally been little emphasis placed on many important aspects of preventative health education. Essential areas where moves to promote health should be 108  increased including the introduction of anti-alcohol and anti-smoking campaigns, including taxation, labeling, and education reforms, and preventive programs to reduce cardiovascular disease, such as hypertension control and diet modification to reduce animal fat consumption. Summary of Recommendations on Health Care Financing Reform * In the short term, budgetary allocations from the center to local authorities should continue to be done on a per capita basis, while the Government should begin to develop more sophisticated mechanisms that include indicators of need (e.g. per capita income) or health status. * A basic package of health care that will continue to be universally available should be identified, with high quality standards of care. * Those services not within the basic package should be charged for within the public system, and/or left to private financing and provision. * Inputs to the health care system should be the focus of initial privatization, as it occurs. * Both the number of doctors and hospital beds should be reduced, and medical training improved. Summary of Foregoing Recommendations on Strengthening Primary Health Care * Current family planning programs should be continued and extended, and contraceptives and information on their use be made easily available. * The cold chain for vaccines should be maintained, and restored in those areas where it has broken down. * Water and sanitation services need to have more extensive coverage and upgrading of existing facilities, particularly in rural areas. This will require revised pricing policy to finance improvements to water quality. * Basic health education, through schools and the local level public health services, needs to be strengthened, particularly in relation to diet and lifestyle. The levels of tobacco and alcohol excise tax should be raised to encourage more healthy behavior. * There must be more effective regulation of pollution, to lessen environmental health risks; at a minimum, existing environmental legislation should be enforced, and incentives given to enterprises, so that industrial pollution is minimized. 109  CHAPTER 8 CONCLUSIONS 8.1 Consideration of the future of social protection in Uzbekistan has highlighted the trade- offs involved in seeking to achieve a minimum standard of living for the entire population. In this way, a national social protection strategy can be developed which will give greater coherence to the structure and incidence of benefits than exists at present. 8.2 For large and growing sections of the population, hit severely by the economic crisis and adjustment, existing measures of social assistance may not provide poverty relief. Simply increasing expenditures on existing measures of social protection is neither sufficient to alleviate poverty, nor is it affordable. The challenge, therefore, is to prioritize social expenditures so that the programs of assistance are more efficient and equitable. It will be vital that economic growth resumes so that the majority of people are able to provide for themselves and their families through access to jobs that pay adequately. In the meantime, making the system more cost effective will involve both reallocation of expenditures for different types of benefits and services, but almost certainly cutting the proportion of GDP spent on the social protection overall. Given that some benefits are below the level where they provide effective poverty relief, public resources will need to be released by cuts to spending on other benefits, particularly pension and remaining explicit and implicit consumer subsidies. The Government has already made significant progress in 1994 in reducing the costs of direct consumer subsidies. 8.3 The chapter outlines several areas where improvements are needed to the existing system of social protection. It then highlights issues of general importance to the future design and likely level of expenditure on the system. This leads to a consideration of various ways in which the Government might seek to meet its social protection and fiscal objectives, and which appear to be the most feasible. This provides the basis for the tentative costing of a reformed system of social protection. The Future Structure and Level of Benefits 8.4 The Government has embarked upon the critical process of deciding the structure of benefits that will best satisfy social protection and fiscal objectives. However, various reforms to social assistance benefits in mid-1994 indicate that a coherent strategy has yet to be decided. The interaction between reforms of individual benefits is important. As reductions in universal consumer subsidies continue to be made, the need for strengthened and targeted social assistance has become more urgent. In fiscal terms, measures such as the near-universal compensatory payments introduced in August 1994 will not be sustainable. The size of the emerging unemployment problem depends on the pace and scale of enterprise restructuring. 8.5 The appropriate balance between social protection expenditure, and spending on health and education, raises some complex trade-offs between short and long run social protection 110  goals. Although the short term income support needs of the people of Uzbekistan are likely to be substantial, the negative medium and long term social externalities that would result from maintaining real levels of benefit expenditure at the expense of the social services should not be underestimated. Within the social services themselves, there is the further need to address both immediate needs - such as shortages of vaccines - and longer term structural problems. 8.6 The main area where the Government needs to cut costs is pensions. In addition, currently implicit consumer subsidies will need to be costed more transparently, and further reforms adopted. The political difficulties of controlling expenditure in both these areas could be significant. However, it is possible to implement specific reforms that are perceived to be fair, and equitable way of distributing the burden of adjustment. Moreover, the costs of failure to reform will be large negative repercussions on efforts to stabilize the economy and subsequent growth. 8.7 The potential net cost savings of reforming consumer subsidies can be estimated. Expenditure reduction will be partly offset by the need for measures to compensate the poor. Direct subsidy expenditure fell significantly in 1994 , although cost reductions were offset in the short term by the introduction of near-universal compensatory payments. Social assistance to low income families, alongside such measures as meal programs and food supplements for disadvantaged groups, are fiscally sustainable ways of targeting disadvantaged groups. 8.8 Uzbekistan is a clear international outlier in the level of pension expenditure relative to its population structure, and the problem is rapidly worsening. Cost savings of various pension reforms were set out in Chapter 5. Reform is needed urgently. The average pension expenditure across the FSU for a country with Uzbekistan's demographic structure is around 6% of GDP, as against the actual figure for 1993 approaching 12%. Pensions - like the social protection system more broadly - should defend a minimum subsistence transfer for all pensioners as a first priority. Payments above this level should continue if they are affordable. Staff estimates suggest that the average age of qualification for pension should be increased and the number of early retirees reduced. Pensioners living in poor households would benefit from an improved system of family allowance, in families with children. In households without children, individual pensioners would continue to receive at least the minimum subsistence benefit, and rely on wages or unemployment and other benefits to support the other household adults. The pilot social assistance scheme introduced in August 1994 could also play a role if the minimum pension is set at levels such that recipients would otherwise fall into poverty. 8.9 Expenditures on pensions and subsidies can be cut in real terms, while in the short term, the system of family allowances could be reformed, so as to make them an effective instrument of social protection. The new pilot scheme of social assistance could also play an important poverty alleviation role. The introduction of near-universal compensatory payments to offset price liberalization should be reconsidered, or at least allowed to erode in real terms, in favor of a better targeted intervention. In principle, a single targeted social assistance benefit would be desirable for a number of reasons (see Chapter 6). If the Government is to pursue the objective of a single social assistance benefit, it will need to decide which of the current social assistance programs will perform the task. Implementation of a targeted social assistance benefit 111  would in turn require determination of a poverty line and methods for targeting those that fall below it. 8.10 It is difficult to quantify future fiscal demands of unemployment benefits, given uncertainty about both projected unemployment, and about the extent to which local authorities will continue to make discretionary payments to the long term unemployed. Another unknown is the number of people who are out of work, but not registered as unemployed, or are otherwise not entitled to unemployment benefit. Presently this group do not show up in EF expenditures, but could become benefit recipients if a means-tested social assistance benefit or child allowance was introduced. The only partial proxy for this group is the number of registered job seekers, but this does not include those who have chosen to bypass the Employment Services altogether. 8.11 The evolution of real benefit levels in 1992 and 1993 indicates that the Government has no clear benefit indexation policy. This creates dual uncertainty for those responsible for budgeting social protection expenditures, in that they must attempt to allow not only for the path of inflation, but also the degree to which benefits are indexed in response to it. Some benefits were allowed to collapse due to failure to index (most notably family allowances), whereas the indexation approach with respect to pensions has led to massive increases in expenditure. 8.12 There are many issues involved in determining the appropriate indexation formula: whether benefits should be indexed to price or wage inflation; whether fully or partially; and whether forward or backward looking. The most important priority is to maintain minimum benefits--for pensions, unemployment benefits and family allowances. This should be linked to past movements in the cost of a minimum consumption basket. For benefits above the minimum, this report has proposed temporary measures that would generate large costs savings-- in particular, flat rate indexation of the pension benefit structure. Towards a Fiscally Sustainable System of Social Protection 8.13 In the short to medium term, total government expenditure needs to be cut. In the sphere of social protection, this report has recommended a series of measures that would reduce social protection spending by about one-fourth, as well as reallocation of social expenditure. Current levels of social protection expenditure in Uzbekistan are higher than its neighbors, and other countries with comparable levels of GDP per capita (see Figure 8.1). 8.14 The options for making the system of social protection more efficient and fairer have been set out in this report. Certain cuts are in order. To summarize briefly, in the area of pensions the replacement rate would be cut through flat rate indexation and reducing pension supplements, the number of groups entitled to early pensions limited and "double dipping" by working pensioners reduced. These measures would reduce public expenditure on pensions by up to 5% of GDP. Expenditure on consumer subsidies would continue to fall, in particular through increasing cost recovery on domestic utilities. 8.15 On the other hand, certain social expenditures are likely to increase in the short term, in relative terms. Rules governing income support for the unemployed would be tightened, the 112  structure of benefits rationalized and job creation activities revised. At the same time overall expenditure on unemployment benefits is projected to rise significantly. The new social assistance scheme might be expanded, if the pilot proves to be successful. A revamped system of targeted family allowances could offer increased real levels of benefit, that would need to be indexed quarterly. Social Expenditure in Uzbekistan Past, Present and Future (% of GDP) _ Pensions LS Subsidies fLE Unemployment ben. & L iiFamily allowances Kl Sick ,ptay & maternity active lab. market measures % GDP 35 - 31.1I 30 t s __ 21.92 20 17 15 _I__ 1 0 1991 1993 1998-7(wlth reforms) Figure 8. 1 Notes: 1996-7 projection with implementation of recommended reforms Health and Education expenditures are not included. 8.16 Figure 8.1 sets out relative spending on various benefits under the proposed reforms. Under this scenario, Uzbekistan would move towards an appropriate range of public expenditure on social protection for a country of its level of income per capita. Strengthening Administration Minimizing administrative inefficiencies 8.17 The inherited system of social protection is associated with certain administrative and organizational problems. Existing procedures tend to be bureaucratic and overly centralized, and the organization is often cumbersome and expensive. A significant portion of the funds being earmarked for social protection are actually spent on administration and overheads. Some aspects of the system could be rationalized - for example, the number of different categories of pensioners. Further technical support, including automation and computerization, could help to strengthen and streamline administration. In addition, it will be necessary to choose benefit schemes that are designed specifically to simplify administration of provision, such as self- 113  targeting TES, or temporary use of flat-rate benefits where needless complexity characterizes the benefit schedule (e.g. pensions and unemployment benefits). Training 8.18 Training of staff working in the area of social protection is an important priority. Training courses could be established in subjects including market economics, labor markets, principles of social protection, public and social administration, and law and legislation. A strong focus on international practical experience, especially from the transition countries of Eastern and Central Europe, would be useful. In this area, the EU/TACIS program has developed an initiative. The placement of individual experts with relevant international experience in the relevant Ministries could assist the design of policies and programs. Finally, pilot projects could seek to facilitate and demonstrate the implementation of reforms (for example, training schemes in the ES) and strengthen the administration in selected localities working toward the development of modern systems of social protection. Improving coordination 8.19 A final basic shortcoming of the existing system is that there is no government agency with the responsibility and authority to consider the costs and benefits of the measures of social protection as a whole (see Chapter 1). There is a fragmentation of roles and responsibilities among various ministries and extra-budgetary funds. The various agencies involved in the provision of social assistance have developed their own criteria and procedures. Given lack of inter-agency communication and coordination, there is often duplication of effort. 8.20 Co-ordination amongst the agencies administering benefits is needed, both to prevent individuals from "double dipping" and to share information. This will give greater coherence to the structure of eligibility for individual benefits targeting mechanisms. In this way, benefits will performn their poverty alleviation and insurance functions more effectively. Data sharing will also check potential abuse of the system. 8.21 The MSP has proposed the formation of a new agency, the Council of System Component Supervisors. If such a group had wide support within the Government, it could play a useful role in promoting the development of a coordinated and integrated system of social protection. Potential activities could include determining the subsistence level that will form the anchor of the system of benefits, and the need for the prioritization of social expenditures, according to the degree to which they benefit the poor. 114  Annex 1: PAYG and Funded Pension Systems 1. There are two main methods of funding pensions: pay-as-you-go (PAYG), used in most state pension systems, and funded - also called fully funded schemes. A PAYG public scheme may be supplemented by private funded schemes. 2. Under PAYG schemes, the current year's pensions are paid from the current year's contributions. Contributions are made on an eamings-related social insurance basis. Funded systems operate on the principle that individuals contribute to a fund during their working life, and, upon retirement, are entitled to collect an annuity (income flow for life). Funded systems can be divided into defined contribution schemes, and defined benefit schemes. Under the first, the individual's pension depends on the level of contributions made by the person, who bears the risk of inflation after retirement, and varying rates of return to the accumulated fund. The defined benefit scheme bases the individual's pension on the number of years of work, and the final salary. The employer bears some of the risk of variable rates of return on the assets of the pension fund assets. 3. The relative merits of funded and PAYG systems raise the following issues: * High inflation. Industrial country experience indicates that funded systems have been vulnerable to inflationary shocks. PAYG schemes have proved to be less so, though no scheme can be insulated from inflation altogether, without intemational diversification of the pension fund assets. * Impact on Savings. Funded systems may increase aggregate savings in the economy, contributing to investment and economic growth, although the evidence is inconclusive. D Investment Strategy. The investments of assets under funded schemes requires experienced fund operators, and developed capital markets, in order to diversify its portfolio. The existence of funded schemes could actually facilitate the growth of domestic capital markets. However, the interaction of funded pension scheme operators and capital markets requires significant regulatory capacity. * Fiscal costs of switching to a funded system. Funded systems may reduce government expenditures on pensions in the long run, but switching from PAYG to funded schemes requires more contributions - from either workers or govemment - to pay for the current generation of pensioners, which has funded the pensions of previous generations, and is entitled to benefits. In Uzbekistan, the fiscal constraints are currently already severe, without the added cost of such a switch. Source: Barr (ed.), 1994 115  Annex 2: Targeting - Individual Assessment Methods Annex I Comparison of Individual Assessment Mechanisms Mechanism Advantages Disadvantages Administrative Requirements Appropriate Circumstances Simple Means Test - records reported family income and - simplicity - inaccuracy - staff to conduct interviews (may be - elements of self-targeting and/or size done in field or office) geographic targeting to help improve accuracy - no attempt to value in-kind income, seasonal income, consider individual - respondents have strong incentive to - recordkeeping - low benefit levels, so absolute adjustments in needs or reans lie about the information admninistrative costs must also be low - no verification of income, except optional home visit to check housing quality Sophisticated Means Test - adjusts family income according to - accuracy - higher administrative costs staff to conduct longer interviews - high benefit levels (student loans, family size, seasonality. costs of housing subsidies, large cash major items such as housing, benefits) university tuition, major mnedical - staff time for verifying information expenses - requires verification of information - verification may work only for - detailed recordkeeping - applicant pool literate and in the through third parties or by having literate applicants working in the formal sector caixtidates submit paystubs, tax formal sector records, receipts, etc. 116  Mechanism Advantages Disadvantages Administrative Requirements Appropriate Circumstances Proxy Means Test - objectively calculates synthetic - uniform systematic algorithm to - requires longer interview than - staff to conduct interviews (may be - broadly applicable needs score based on a series of weight variables simple means test done in field or office) variables that may include housing - especially useful when characteristics and location, family - not clear to applicant how to lie - weighing algorithm is inflexible, - detailed recordkeeping i) large benefit levels are to go to structure, occupation, education, effectively may not detect special circumstances candidate pool from illiterate, gender of head, ownership of durable such as catastrophic illness, natural - computerized option requires data informal sector. goods - gets at permanent income without disasters. entry capacity, sometimes at local having to adjust for seasonal or in- level. Software design can be ii) access to basic infrastructure is - calculation of index may be done kind income - applicants may perceive system as centralized so extensive that it does not by interviewers or computer arbitrary distinguish need very well in less - high marginal tax rate problem - previous analytical work and detailed assessments avoided periodic updates to establish variables and weights Social Worker Evaluation - subjectively evaluates the same kind - can detect special circumstances -uniformity and consistency hard to - staff conduct interviews - broadly applicable of information as used in proxy ensure means test - recordkeeping - mixed record in practice - applicants may perceive system as allowing favoritism, influence peddling Nutritional Status - weight for age - objective, verifiable, accurate - curative orientation, waits until child - growth monitoring capacity - malnutrition widespread indication of need is malnourished before intervening - growth faltering - high accuracy in growth monitoring - forms part of well-established - more preventive focus, detects - standards can be controversial capacity preventive health package - nutritional risk as figured by problems earlier mother's fertlity history, siblings' - results very sensitive to inaccuracy - prior studies to determine risk health history, family socio-economic - preventive focus in weighing and recording and to factors and their weights characteristics child's state of hydration - forms part of well-established - training for medical staff in preventive health package - adds new information requirement in unfamiliar process health services Source: World Bank (1992) 117  Annex 3: Equivalence Scales 1. Equivalence scales adjust household incomes for differences in household size and composition so that income distributions present a more accurate picture of individuals' relative well-being within an economy. The common practice of utilizing household per capita income is in fact an equivalence scale which gives equal weight to all members of a household and does not account for economies of scale in consumption (e.g., cooking utensils, clothing, housing rent). A widely used method for determining equivalent income is the following: Ye = Y/n0 where, Ye is household equivalent income, Y is total household (disposable) income, n is household size, and 0 is the elasticity of household needs with respect to household size. The denominator, no, can be interpreted as the equivalent number of single persons. For example, the OECD equivalence scale which counts the first adult as l, other adults as 0.7, and each child as 0.5, corresponds to a value of 6 broadly equal to 0.7. That is, a 10% increase in household size leads to a 7% increase in household needs. 2. The equivalence elasticity, 6, lies in the range [0,1]. At one extreme, 0=0, no attempt is made to adjust household income for household size, implicitly assuming infinite economies of scale (i.e., any increase in household size does not increase the household's needs). The other extreme, H= 1, corresponds to householdper capita income and, as mentioned, does not allow for economies of scale in consumption. To illustrate the difference equivalence scales can make in poverty incidence, suppose a family of two parents and two children has total disposable income of 1000. With d= 1, Y,=250; with 0=0, Y, = 1000; and the OECD scale would yield Ye-379. Depending upon the poverty line and equivalence elasticity, this family may or may not be considered poor. This simple example indicates the importance of equivalence scale choice. 3. The choice of equivalence scale reflects judgement about technical issues such as economies of scale in consumption as well as value judgements about the priority assigned to the needs of different groups, such as children and the elderly. For example, some scales take more account of household composition than others by making an individual's needs vary with his or her activity status and age, in addition to the standard adult/child distinction. Policymakers utilize a wide range of scales along the [0,1] interval; there is no concentrated range of conventional equivalence scales. In short, the relative poverty of households of different sizes depends critically on the size elasticity. As a result, equivalence scales can have a significant impact on policy decisions as well as government social expenditure, a particularly important consideration during economic reform. For example, by allowing for economies of scale in consumption, equivalence scales can lower the total expenditure necessary for family allowances. 118  Annex 4: Potential Years Lost (PYL) And Disability Adjusted Life Years 1. The estimates of PYLs and DALYs in Chapter 7 are based on the methodology of the 1993 World Development Report. Explanations of the two terms are set out below: PYL: For each death, the number of years of life lost is defined as the difference between the actual age of death and the expectation of life at that age. For disability, the incidence of cases by age, sex, and demographic region is estimated on the basis of expert opinion. The number of healthy years of life lost is then obtained by multiplying the expected duration of the condition (to remission or death) by a severity weight. Diseases are grouped into 6 categories of severity. Death and disability losses are then combined, and allowance made for a discount rate of 3 % (so that future years of healthy life are valued at progressively lower levels) and for age weights (so that years of life lost at different ages are given different relative values). The value for each year of life lost rises steeply from zero at birth to a peak at age 25 and then declines gradually with increasing age. DALYs: The combination ofdiscounting and age weights produces thepattern of DALYs (disability-adjusted life years) lost by a death at each age. The sum across all ages, conditions, and regions is referred to as the global burden of disease. Source: World Development Report, 1993 119  Annex 5. Demographic Figures and Projections Age Group 1985 1990 1995 2000 2005 2010 Total M + F 18090 20532 22765 25224 27696 30147 Males 0-4 1490 1684 1545 1526 1554 1578 5-9 1204 1462 1659 1536 1519 1548 10-14 1039 1187 1446 1655 1532 1515 15-19 916 1021 1170 1440 1648 1526 20-24 832 885 993 1161 1429 1636 25-29 813 793 850 983 1150 1417 30-34 636 778 762 841 973 1140 35-39 460 607 751 752 832 964 40-44 262 438 585 739 741 821 45-49 290 246 419 570 722 725 50-54 295 274 232 402 549 697 55-59 243 273 254 218 378 518 60-64 197 217 245 230 198 346 65-69 89 167 185 210 198 172 70-74 55 69 130 145 167 160 75+ 115 84 80 123 160 195 Total 8935 10184 11308 12530 13750 15958 Females 0-4 1448 1620 1485 1465 1491 1512 5-9 1180 1423 1598 1479 1460 1486 10-14 1020 1164 1409 1596 1476 1458 15-19 915 1002 1149 1406 1593 1474 20-24 842 883 976 1146 1404 1590 25-29 817 804 852 973 1144 1401 30-34 636 786 779 849 970 1141 35-39 466 614 767 775 845 967 40-44 261 451 600 762 771 841 45-49 281 252 245 594 755 764 50-54 300 272 441 433 585 744 55-59 270 288 263 239 423 572 60-64 245 254 274 252 230 409 65-69 158 222 234 256 238 218 70-74 13 133 192 207 231 217 75 + 204 180 193 262 331 394 Total 9155 10348 11457 12694 13947 15189 Birth Rate 36.0 29.2 25.7 23.6 21.9 19.5 Death Rate 6.9 5.8 4.9 4.9 4.9 4.8 Rate of Nat. Inc. 2.91 2.34 1.87 1.87 1.70 1.47 Net Migration Rate -3.7 -2.8 0.0 0.0 0.0 0.0 Growth Rate 2.53 2.06 2.05 1.87 1.70 1.47 Total Fertility 4.285 3.793 3.301 2.886 2.543 2.206 NRR 1.977 1.762 1.546 1.361 1.196 1.050 Dep. Ratio 81.4 84.3 80.5 70.8 59.7 53.1 120  Glossary Absolute poverty: poverty measured in terms of a fixed standard--typically minimum subsistence level--as opposed to relative poverty. Cash benefits: income support in the form of money, as opposed to in-kind assistance (e.g. subsidized food). Categorical benefits: Income transfers based on the individual or household's category (e.g. number of children, gender of head of household), as opposed to income. Child benefit : cash benefit for families based on the criterion of having children--also known as family allowances. Consumer subsidies: government expenditures directed to keeping the prices charged for certain goods and services lower than the market price. The subsidies may be explicit (and shown in the budget) and/or implicit (such as subsidies on imports through an overvalued exchange rate). Earnings-related benefit: benefit paid as a percentage of previous earnings (as opposed to flat rate benefits); hence individuals with higher previous earnings receive a higher benefit. Flat rate benefits: benefits paid at a fixed monthly rate (although there may be add-ons for dependents), and not related to previous income. Gini coefficient: A measure of income inequality in a society, calculated on a scale of zero to one. The higher the value, the less equal is the income distribution. Human capital: the skills and attributes embodied in people, inter alia, because of their education and training. Incomes-tested benefit: benefit awarded to people whose declared income (and/or wealth) falls below a certain threshold; also known as means-tested benefit. In-kind benefits: transfers to individuals in non-cash form--e.g. subsidies on food, or, in Uzbekistan, various privileges. Minimum subsistence level: the amount of income required to enable people to purchase a nutritionally adequate diet, and non-food requirements. Proactive labor market programs: measures intended to increase the chances that unemployed individuals will find a job; e.g. training and retraining. Progressive: a measure that redistributes income from better-off to worse-off people; as opposed to regressive, which does the reverse. Relative poverty: poverty defined in terms of certain proportions of the population--e.g. the bottom two deciles--as opposed to absolute poverty. Replacement rate: the ratio of a benefit to past earnings. Social assistance: benefits paid, in cash or kind, to individuals typically because they are poor. Benefits may be paid on the basis of low income, or some other correlate of poverty. Social insurance: benefits paid to an individual because of past contributions, which are often compulsory, and generally without any test of current means or need. Take-up: the proportion of eligible people who are actually in receipt of a benefit. 121  BIBLIOGRAPHY Atkinson, A. (1989): Poverty and Social Security, Harvester Press, Hemel Hempstead. Atkinson, A. and Micklewright, J. (1992): Economic Transformation in Eastern Europe and the Distribution of Income, CUP, Cambridge. Australian Department of Social Security (1993): Information Handbook, Government Printer, Canberra. Barr, N. ted.] (1994): Labor Markets and Social Policy in Central and Eastern Europe: The Transition and Beyond. World Bank, Washington DC. Commander, S. and Jackman, R. (1993): Providing Social Benefits in Russia: Redefining the Roles of Firms and Government, World Bank PRWP 1184, Washington DC. Commander, S., Lieberman, L., Yemstov, R. (1993): Unemployment and Labor market Dynamics in Russia, World Bank PRWP 1167, Washington DC. Easterly, W. and Fischer, S. (1993): The Soviet Economic Decline: Historical and Republican Data, World Bank WPS, Washington DC. Fretwell, D. (1992): Developing Effective Employment Services, World Bank PRWP, Washington DC. Fretwell, D. and Jackman, R. (in Barr [ed.]): The Role of Employment Services in Transition Economies. Kaiser, M. (1993): Active Labor Market Policy in the New German States. World Bank Conference Paper, Tashkent. Lanjouw, P. and Ravallion, M. (1994): Are Larger Households Really Poorer? PHRD Working Paper, World Bank, Washington DC Lubin, N. (1984): Labor and Nationality in Soviet Central Asia, Johns Hopkins Press, Baltimore Marnie, S. (1992): The Soviet Labor Market, EUI Press, Florence Marnie, S. and Micklewright, J. (1992): Poverty in Pre-Reform Uzbekistan: What do Official Data Really Reveal? EUI Working Paper 93/35, Florence Mamie, S. and Micklewright, J. (1992): Poverty in Uzbekistan and Ukraine: A Comparative Analysis, mimeo, European University Institute, Florence Marnie, S. and Motivans, A. (1994): Women in the Labor Market: A Comparative Study of 4 FSU Republics, mimeo, EUI. Milanovic, B. (1992): Cash Transfers, Direct Taxes and Income Distribution in Late Socialism, World Bank WPS 1176, Washington DC Popkin, Karmanalieva and Altunina (1993): The Subsistence Minimum Income of the Kyrgyz Republic, mimeo. 122  Sipos, S. (1993): Poverty Measurement in Central and Eastern Europe before the Transition to the Market Economy, UNICEF UNICEF (1992): Rapid Assessment of Republic of Uzbekistan Wenzel, G. (1993): Social Benefits and Social Services in Germany, World Bank Conference Paper, Tashkent World Bank (1993): World Development Report --------- (1993): Uzbekistan: An Agenda for Economic Reform, Washington DC --------- (1994): Uzbekistan: Subsidies and Transfers, Washington DC ----------- (1992, M.Grosh ed.): From Platitudes to Practice: Targeting Social Programs in Latin America, Regional Studies Program, Washington DC 123