Uzbekistan Towards 2030:

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1 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society The study is financed by the Poverty Thematic Trust Fund (PTTF) in cooperation with the UN Bureau for Development Policy (New York, USA) within the «Transformative Social Protection in a Transforming Society and Economy» Project. Summary: This research utilizes an innovative approach to social protection, considering it in a broader sense, including not just benefits and pensions, but a range of policies for the labor market, education system, healthcare, and social programs for providing housing and other assets. This approach is in line with that of the United Nations Social Protection Floor Initiative, which sets out the obligations of governments to guarantee citizens rights to minimum incomes and to basic public services; and to expand these minima in line with the country s development. It provides an opportunity to look at social protection in the context of structural transformation of the economy, anticipated changes in demographic patterns, social structure and changes in the lifestyles and values of people over the medium and long term. As the country enters a new stage of development, it is time to review the positive roles which social protection can play in stimulating transformative processes in the economy, society and institutions. 1

2 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Box 1. The social protection model of Uzbekistan is different from other foreign models Social protection models in various countries can be split into two major groups. One option is to focus more on the safety net functions of social protection and develop a generous social security system, providing universal access to basic social services and encouraging a more egalitarian distribution of income. In this case, the scale of redistribution policies leads to a high tax wedge in the economy (the Scandinavian countries are examples of such a system). The other option is to limit social spending and reduce the tax burden in order to stimulate development of the private sector, generate employment and, hence, improve welfare without creating an excessive fiscal burden (this model is more relevant to Asian countries that are striving to maintain high economic growth rates along with modest social safety nets). Uzbekistan s social protection model does not fall into either of these groups, due to the conditions under which the country started its economic reforms in the early 199s. On one hand, the real sector of the economy, which was previously a part of a much larger system and which, de jure, became independent, was not designed for a high tax or social burden. On the other hand, the country had a developed system of social institutions, at a level comparable with rich countries. In the early 199s, Uzbekistan offered free health care and primary, general secondary, secondary-special and higher education. A sharp reduction in financing of social services would have resulted in an even bigger drop in incomes, as in 1991 the social sector accounted for over 18% of employment. In terms of civilizational development, the quality of human capital and societal commitment to humanistic values, Uzbekistan was also close to developed economies. Under such conditions, a sharp cut in social expenditure, even for the sake of economic growth, was not considered, even in principle. Since 1991, the share of social expenditure and social protection in the state budget has never fallen below 5%. The main characteristics of the Uzbek social protection model are still in place, while state social expenditure is around 6%. In terms of the tax burden and social contributions, government expenditure as a proportion of GDP and uniformity of the income distribution, Uzbekistan is closer to the developed economies. However, in terms of economic growth rates and GDP per capita, the country is more similar to its Asian counterparts. Figure 1. Taxes in Uzbekistan are considerably lower than in Scandinavia Figure 2. As in the Scandinavian model, Uzbekistan has large social expenditures Figure 3. Compared to Asian countries, income is distributed more equally in Uzbekistan Figure 4. Uzbekistan manages to have high economic growth rates and at the same time maintain an effective social protection system 2

3 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Social protection helped to maintain social stability and ensure social rights in the transition period The main objective of social protection in the early stages of Uzbekistan s transition period was to protect vulnerable groups by providing guaranteed minimum incomes. In the difficult period of structural reforms, social protection helped to mitigate some of their undesirable impacts on the population, to maintain social stability and guarantee basic social rights. Social protection policies were successful in preventing a large share of the vulnerable from falling into poverty. Moreover, Uzbekistan managed to preserve the access of children from low-income families to free health care and education and to maintain its pre-reform levels of literacy. Economic growth has been strong for almost a decade and the country has graduated to middle-income status. But this is bringing new challenges in transforming the economy and society. These transformations will have a significant effect on the well-being of people, their available choices and social rights. Demand for social services, in terms of both type and quality, will also change. The current social protection model will also have to be revised in line with these new demands and transformations. The parameters of the social protection model in this new stage of development will be determined by the targets and objectives of Uzbekistan s overall development policy in the medium- and long term. Uzbekistan-23: Development Goals for the Long term After 2 years of transition, Uzbekistan has managed to graduate to lower middle-income status. The main development goal for the country now is to join the group of upper middle-income countries by 23. With this end in view, it is important to maintain stable economic growth rates at 7-8% per annum over the next 15-2 years. Maintaining such high growth rates while ensuring social stability will require structural transformation of the economy in a number of directions. First, with the completion of the 2-year transition period, the industrial sector has to gradually shift its focus from capital-intensive basic industries towards developing manufacturing sectors that produce goods of higher technological sophistication and contribute more to the growth of productive employment. According to the estimates of CER, to provide the rapid and sustainable economic growth the share of manufacturing in GDP will have to increase from 9% in 21 to 22% in 23. Second, the role of agriculture also needs to be transformed. At earlier stages of development, the main objective of agriculture was to ensure employment and help guarantee minimum incomes for a large number of people. From this point on, it is important to focus more on raising the efficiency of the agricultural sector to sustain food security, diversify production and promote productive employment. Increased agricultural efficiency will provide an opportunity to attain all the targets set for the sector, while its share in GDP is forecast to decline from 19.5% to 8%. 3

4 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Third, it is essential to shift towards producing more sophisticated services. This will allow the share of services in the country s GDP to increase from 42.5% in 21 to 55% in 23, contributing to the expansion of productive employment and improving the quality of human capital. Along with the transformation of the economy, society will also change in line with the chosen development path and long-term development objectives. It is expected that the share of the middle class will grow to reach 6% of the population by 23, and that there will be a reduction in the existing gap in living standards and opportunities between urban and rural populations. These transformations will in turn affect social values and behavior, encouraging more striving for individual self-fulfillment and more demands regarding gender equality. Transformation of behavioral stereotypes could also mean that families and households become smaller, which in turn may lead to the reduction of informal protection networks through extended families etc. and may put more pressure on the protective role of the formal social protection system. Social Protection in the New Stage: Not Just Protecting, but Promoting and Transforming In order to define the roles and objectives of social protection in this new stage of development, it is important to consider how the anticipated transformative processes will affect individuals. Implementation of structural reforms, and the corresponding growth of services from 45.1% to 55% of GDP and of manufacturing from 9% to 22%, should lead to an expansion of employment opportunities. In fact, total employment should increase from 12.2 million (66% of the labor force) in 212 to 17.5 million (76% of the labor force) by 23. Accelerated transformative processes will impose a need to take a new look at the future of social protection Estimations of the Center for Economic Research. 1 Changes are also expected in the structure of employment. It is estimated that the share of employment will increase from 6% to 69.5% in services, and from 13% to 21.5% in manufacturing, while in agriculture it will decrease from 27% to 9%. Moreover, formal employment should expand from 39.6% to 68.5% of the total. As a result, personal income should also increase considerably: the average wage throughout all sectors is expected to increase to more than 515% of the current level (i.e. by more than 5 times in real terms). Such significant growth in employment will provide greater earning potential, resulting in a decline in poverty rate from 15% to 8% by 23 (definition of poverty is based on the consumer basket to ensure a 21 calorie intake per person a day). Overall, living standards should improve considerably. As a result, the number of people in need of protection from poverty through receipt of social assistance benefits should drop substantially. The number of recipients of low income allowances is expected to decrease from 76,3 in 212 to 55,37 in 23. For low-income families with children the demand should also decrease from 9,7 in 212 to 653, in 23 due to the growth of their family incomes. At the same time more protection for children will be pro- 4

5 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Figure 5. Uzbekistan 23: Structural transformation will change the demand for social protection By 23, the share of manufacturing and services in the economy is expected to soar 45, ,5 8 26, Extractive Manufacturing Services Agriculture The share of formal employment will nearly double, average wage is expected to increase more than fivefold by ,% 39,6% ,5% 23 Employed (% of employable population) Formally employed, % Average wage (212=1%) 12 Revenues ,% Growth of formal employment will increase Pension Fund revenues thus ensuring its proficit Expenditures As a result of structural transformations, employment in manufacturing and services is expected to increase 6 69, , Manufacturing Agriculture Services Growth of personal income and poverty reduction is expected to reduce the demand for social allowances from 977 to 79 thousand families ,% ,% Recipients of social allowances, thou families Poverty rate, % The expected proficit of Pension Fund will allow cutting PF contributions from 3. 8% to 17. % 3,8% 79 17,% vided through expansion of the enrollment in pre-primary education from 23% to 6% in 23, expansion of special programs of de-monetized assistance for children (winter clothing etc.) from 2% of government budget to 2,8%, focusing on providing better healthcare services for children etc. More focus will also be put on providing local support services to households at risk. However in this case, a different need will arise it will be important to help people find employment, to earn decent incomes, to remain involved in economic activities and to maintain their social rights. The system of social protection will need to contribute to creating such opportunities through taking on more of a promoting and transformative role. In fact, social protection should in the future become more active in promoting and transform- 5

6 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Figure 6. Demotivating effect of allowances: the recipients and non-recipients of allowances who believe that: Source: Results of the Sociological survey, CER 213 The new social protection model should not only protect, but also create opportunities to involve people in economic and social activities, thus transforming their values and stereotypes 2 Sociological survey Transformative social protection in a transforming economy and society, CER, 213 ing recipients to enable them to contribute to the country s further economic growth through participation in productive employment. The existing social protection system will need to be adjusted to perform in a completely different context, with a completely different fiscal base and completely different roles to play. With the transition to a more targeted system of social protection, the focus in the transition years was on providing a social assistance benefit (as well as providing land plots for the population, privatization of housing etc), providing short-term support to families with children (support for the longer term is provided upon further request), and maintaining universal access to social insurance schemes (primarily pension schemes). As the country enters a new stage of development, social protection policies need to be more closely inter-related with the employment policies. These policies need to be designed to complement each other as much as possible. At present: 1) Labor market policies are currently geared towards the objectives of the transition period, and chiefly promote generation of employment in technologically simple industries. Employment policy as well as other related policy measures will need to focus more on creating more productive employment in manufacturing industries and services with higher value added. 2) The educational system is also aligned with the existing economic structure and promotes the continuation of the existing employment structure. In fact, the experience of foreign economies shows that in order to ensure the required growth of the manufacturing industries, it is essential to have more than 15-2 engineers and natural scientists per 1mln of the population. At the moment Uzbekistan has about 54 engineers and natural scientists per 1 mln of the population. Future change in the economic structure will trigger growing demand for employees qualified to work in more sophisticated manufacturing industries (electrical engineers, chemists, etc.). 6

7 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Figure 7. The highest multiplier effects on demand and supply are provided by chemical, mechanical engineering, transportation, electric power and oil production industries Figure 8. The highest multiplier effects on employment are provided by the chemical, mechanical engineering, housing and utilities, transportation, trade and communications industries Generation of productive employment in industries with large multiplier effects will contribute to the sustainability of social protection 3 Estimates made in the paper Employment in Uzbekistan: challenges and prospects, 213/5, CER 3) Social allowances do not provide sufficient incentives and opportunities for recipients to move up the income scale. In particular, according to a survey, current social allowances mainly have demotivating effects, and - due to the form of providing the allowances as well as the lack of linkages with employment policies are not efficient enough in opening up opportunities for recipients to become active contributors to and protagonists of social transformation processes. Taking into account anticipated demographic trends (population growth, changes in the social and sex/age structure) in the event that the anticipated transformations of the economy are not implemented, the preservation of the current social protection model could considerably increase the financial burden on the budget and threaten fiscal stability. With the current social protection system, and limited opportunities to accelerate transformative processes in the economy and society, the cost of social allowances in the state budget will increase from 5.7% in 212 to 6.7% in 23. This may complicate fulfillment of the main functions of social protection and guarantee of social rights in the future. In order to reduce this risk, the social protection system should continue to provide a safety net for those who face a sudden change in circumstances or who are incapable of supporting themselves; but also have a clear shift in focus towards more promotive measures that could have considerable multiplier effects in terms of accelerating reform processes in the economy and society. The new social protection model will not only have to re-design its protective functions but also develop new instruments to help the vulnerable acquire the capabilities to allow them to access new opportunities. This would include mechanisms to involve vulnerable groups in more formal and rewarding economic activity and to move up the income scale, thereby shaping new values and ideals and transforming society in line with current and future economic, political and institutional transformations. This would require an expansion of the conceptual framework of social protection to be strongly linked with labor market policies, reforms in the educa- 7

8 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society tion and healthcare systems and social programs to provide housing and other kinds of non-monetary aid. The key factor in building a new social protection model will be an effective employment policy. According to the priorities of the long-term economic and social development plan, it is important to generate productive employment in industries that can have significant multiplier effects in associated industries and the economy as a whole. This will generate more stable and higher incomes, contribute to improvements in the quality of human capital and increase state budget revenues (through a broadening of the tax base), which then can be redistributed to finance social protection measures. According to recent estimates, the industries that could have the largest multiplier effects on output, employment and value added include chemical industries (including oil- and gas-related chemical industries), machine building, transportation and communication services. For this reason it is important to create the enabling environment that would contribute to development of these industries. Overall, the design of various elements of the social protection system will have to be adapted and carefully sequenced with new emerging patterns of employment and income structures. The education structure needs to be transformed by expanding the share of engineering and technical specialties Social Protection Towards 23: How to Create Opportunities in a Changing Economy and Society To create opportunities for the population to realize their social rights and provide for social stability during the transformation it is important to implement a number of key measures, outlined below. 1) Organize large-scale training and retraining programs for specialists to ensure the alignment of available skills with the demands of the labor market. Taking into account the expected rapid increase in productive employment, flexible retraining programs quickly reacting to a changing demand, are important to prepare people for more highly skilled jobs. For the next 5-7 years, assuming rapid employment growth and the fact that the skill sets of around 5% of specialists do not meet the demands of the labor market, there is a need to retrain an average of 5, people per year during the first three years and 1, people per year during subsequent years. The annual cost of financing such programs would amount to 52 billion soum during the first three years and 14 billion soum per year (in current prices) during subsequent years. To finance these retraining programs, contributions to the Employment fund need to be increased gradually from.1% to 5% of wages by 217. Such an increase in contributions to the Employment fund could be achieved without an increase in the tax wedge through the expected expansion of formal employment and the corresponding growth of pension fund revenues. 8

9 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society 2) Revise the content and structure of education in line with economic and social changes. Structural reforms and corresponding growth of the share of manufacturing industries producing goods with a higher level of technological sophistication will increase demand for qualified personnel, which will require changes in the structure of education. Based on the experience of economies that have managed to become upper middle-income countries within a short period of time, to get the share of manufacturing to 2%, the number of graduates in engineering, technical and natural sciences has to increase from 12,2 to 61,6 by 23. The number of economics, law and business graduates would need to increase from 6,3 to 5,7, while the number of pedagogical graduates should decline from 28,2 people to 16, over the same period. This means that the total number of graduates from higher education should increase from 6,9 to 16, by 23. This will require higher education enrollment to increase to 25%. Accordingly, the number of vocational college graduates should gradually decline from 518, to 462,, with a parallel increase in the number of lyceum graduates from 36,4 to 163,. Along with the changes in the educational structure, in order to create opportunities for the expected future growth in formal employment, greater attention has to be paid to the quality of education at all levels. In this context, creating effective incentives for teachers is an important factor. Taking into account projected growth in wages throughout the economy (average wage at 2,6, soum in current prices), to ensure competitive compensation of teachers by 23 it will be necessary to increase expenditure per pupil, both in general secondary education, and in secondary-special and higher education. In particular, expenditure in general secondary education has to increase by a factor of 3.4, in secondary-special education 4.9-fold, and in higher education 3.6-fold. The size of social allowances has to be increased to a level that would allow the recipients to retrain, look for jobs and break out from the low-income category The change in demand and expenditure in education will eventually impose the need to reform the system of financing education. In particular, as incomes grow, it should be feasible to reduce the proportion of public financing. In the secondary-special education sector, for example, the number of students who are educated at the expense of employers should increase to 48% by 23. In higher education, the share of students studying on a contract basis should rise from 65% to 78%. 3) Develop the system of social allowances in order to contribute to the transformation of values and behavior, thus enabling the vulnerable to achieve sustainable livelihoods and graduate to higher social strata. The vector of social assistance has to be changed to help vulnerable groups to break out from poverty and transform their mindsets, values and lifestyles. Sociological survey Transformative social protection in a transforming economy and society, CER, The sociological survey reveals that the size of allowances needs to be expanded to increase the incomes of recipients to a level that would allow them to retrain, find better jobs and break out from the low-income category. The ratio of allowances to average wages is 25%, whereas, based on international experience, an optimal ratio is 33%. An anticipated decrease in the poverty rate and a reduction in the number of families in need of allowances 9

10 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Figure 9. To increase the share of the manufacturing industry in the economy to 2% by 23, the number of engineering and technical graduates has to be increased to 61,6 by 23 Figure 1. By 23, the burden on the Pension Fund will increase: the number of pensioners will expand 2.5 times from 977, families in 212 to 79, in 23 will free fiscal resources to increase the size of allowances five-fold, which would improve social mobility. Given the growth of government revenues due to the expansion of formal employment, even with a five-fold increase in social allowances, the share of allowances in the government budget would decline from 5.7% to 4.9%. The decrease in the number of welfare recipients will create additional opportunities to expand the coverage of social programs to increase their transformative effect. Such programs might include non-monetary social aid programs for pupils (providing sportswear for girls, providing textbooks, school supplies and winter clothing for pupils). According to survey results, such programs stimulate the involvement of girls in sports, contribute to the transformation of gender stereotypes, and improve the role and importance of education in low-income families. By 23, taking into account the reduced demand for social allowances, the share of non-monetary social aid programs could be increased from 2% of the government budget to 2.8%. 4) Create conditions to meet the social rights of pensioners by increasing pensions and involving those that are willing to work in active employment. To satisfy the social rights of pensioners, the average pension needs to be increased by 4-5 times In future, the main task of the pension system will be to create the conditions to meet the social rights of pensioners. In this regard, in order to make people feel protected in retirement, the minimum and average old-age and disability pensions should be increased by 4-5 times (in current prices). The major challenge of this task is that by 23, according to analysis of demographic trends, the number of people of retirement age will have increased considerably, by around 2.5-fold. However, implementing the recommended increase in pensions while maintaining the sustainability of the Pension Fund should be possible due to projected growth in Pension Fund revenues. This should result from a near-doubling in formal employment and a more than 5-fold increase in the average wage by 23 in comparison with

11 Uzbekistan Towards 23: A New Social Protection Model for a Changing Economy and Society Figure 11. Average old-age and disability pensions should increase by more than 4% by 23 (212 = 1%) Social surveys indicate that 3% of old-age and disability pensioners both want to work and consider themselves capable of working, while not more than 5-6% of the disabled and retired are currently employed. In order for these groups to realize their social rights, they should be given opportunities to work. At the same time, it should be recognized that the disability pensions have more social inclusion policy aspect, rather than an economic one. The opportunity to work will help people with disabilities actively participate in social life and cover the extra expenditures that these groups usually have. During the transitional period, given the limited capacity of the labor market, such opportunities were limited. The future transformation of the economy and faster job creation will create opportunities to employ a much higher proportion of old-age and disabled pensioners. Transformation of the economy will provide opportunities to employ 3% of old-age and disabled pensioners The role of social protection in this case will include measures to simplify active employment of such groups. For instance, in order to increase the adaptability of the disabled to the labor market, their access to professional education needs to be expanded; while access to disabled facilities has to be improved in order to create a barrier-free environment. Administrative systems also need to be improved, and incentives to employ the disabled in the formal sector have to be created. The study is financed by the Poverty Thematic Trust Fund (PTTF), which is a global UNDP initiative that supports country studies on social protection, of which Uzbekistan is a part, in cooperation with the UN Bureau for Development Policy (New York, USA) within the «Transformative Social Protection in a Transforming Society and Economy Project.