Statement by Joaquim Carvalho at the Board meeting of March 10, 1998

International Bank for Reconstruction and Development 87260 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS98-84 March 9, 1998 Board Meeting of Tuesday, March 10, 1998 Statement by Joaquim Carvalho Uzbekistan - Country Assistance Strategy We wish to express our support for the proposed Country Assistance Strategy for Uzbekistan and would like to commend those who have prepared it. We find the discussion of the country’s performance over the last three years to be candid. In line with the slow momentum of the overall reform program, growth in the private sector has been slow in Uzbekistan compared to that of other CIS countries. It is, however, encouraging to note that the share of the private sector in GDP increased substantially at the end of 1997 as a result of small enterprise privatization, small-scale investment in new businesses, and foreign direct investment in joint-ventures. And more generally, the Uzbek government has made satisfactory progress towards market institution building, sectoral development and improving social protection. In spite of these positive trends, there are reasons to be concerned about the general environment for the development of economic activities, particularly in the private sector. This, we understand, is a result of extensive government controls in a large sphere of activities. While we would like to see the government continue to show great interest in the development of both private and public sectors, we believe that achieving this objective would require the removal of controls on production, investment and prices in the economy since not doing so could adversely affect the growth of FDIs and new businesses. In this regard, we are pleased to note the government’s reaffirmed commitment to continue the gradual elimination of most controls and restrictions on trade and payments. We note with great concern the continued divergence in opinion about reforms between the Bank and the Uzbek authorities. It is imperative that such a divergence be resolved with improved dialogue on a number of issues. While we would like to see major reforms implemented to attain sustainable growth, we find it difficult to ignore the argument of the Uzbek authorities that to prevent the collapse of output, to ensure the import of essential food stuffs at affordable prices, and to enhance productivity and promote dynamic comparative advantage of the Uzbek industry, the controls now in place are necessary transitional measures for the economy. Of perhaps equal significance is the fact that the government believes that corruption and criminality would become more rampant if sweeping liberalizations were implemented without the basic foundation to sustain such  2 measures. Therefore, to enhance the dialogue on these issues, efforts must be made to direct more Bank non-lending activities, especially in the area of socio-political and economic analysis, with a view to improve the understanding of the Uzbek authorities as well as enabling the Bank to understand and appreciate concerns raised by the authorities. The high incidence of poverty, notwithstanding the impressive record on literacy and life expectancy, remains a serious cause for concern. Of greater concern, however, is the wide disparity in rural and urban incomes compounded by the imbalance in the regional intensity of poverty. Thus, it is not only necessary to strengthen the community level management of safety nets, which declined from 10.6 percent of GDP in 1992 to 3.4 percent, but it is equally necessary to develop a national policy that will ensure the reduction or elimination of regional differences. We find the proposal in the Bank’s Country Assistance Strategy broadly in line with what appears to be a convergence of opinions between the Bank and the Uzbek authorities on what could be done now. We are, however, concerned that the four key areas of focus for Bank assistance in paragraph 41 have not specifically targeted poverty. Furthermore, even though agriculture may have the effect of increasing rural incomes, there seems to be no clear strategy on how such incomes will be distributed or the development of measures aimed at diversifying rural activities to make a dent in both rural and urban poverty. We would like to have some staff comments on this issue. We are also quite pleased with IFC’s involvement in the development of the private sector. With regards to the Corporation’s assistance strategy, we are particularly pleased with its focus on the financial sector and export-oriented industries. We also welcome its collaboration with IBRD to assist the development of SMEs. We would, however, like to make a specific comment on the issue of participation in the design of Country Assistance Strategies. Many Country Assistance Strategies coming to the Board recently have benefited immensely from the participation of groups within the affected countries. This has helped to shape Bank assistance, which now takes into account the different needs and concerns of would-be- stake holders in the different countries. We wonder to what extent this Country Assistance Strategy has benefited from the participation of groups, including civil society in Uzbekistan. We would appreciate some staff comments on the general participation of groups in the development of the Country Assistance Strategy. Finally, given the various arguments in the document, we have no difficulty in endorsing the lending levels in paragraph 44 of the Country Assistance Strategy, bearing in mind the need for a more flexible application of the lending triggers as well as the need to direct more resources to poverty alleviation.