Sandeep Mahajan
The strongest force for poverty reduction is economic growth
Sandeep Mahajan is a Practice Manager in the World Bank’s Macroeconomic, Trade, and Investment Global Practice, responsible for the Europe and Central Asia region. We talked about the economic transformation of Uzbekistan, poverty, Washington consensus, reform process in Uzbekistan.
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Hoshimov: Hi everyone! This is Behzod Hoshimov and Hoshimov’s Economics. We have a special guest. Our guest is Sandeep Mahajan. He's a practice manager at the World Bank. Welcome, Mr. Mahajan!
Sandeep Mahajan: Thank you very much!
Hoshimov: I'll introduce you to our audience. You are a practice manager at the World Bank's Macroeconomic, Trade and Investment practice responsible for Europe and Central Asia. You had quite a vast experience in many parts of the world, including Asia as in Vietnam and also Africa and in South Africa. Today you came to Uzbekistan to attend the economic forum. I will ask you questions about our country, your experiences in other places and how we should think about economic development. The first question is, I read your blog post about macroeconomic stability and exceptionally high returns on investment and why they're not a sufficient condition for private investors. Why having both macroeconomic stability and pretty good returns don't guarantee investment interest? Can you elaborate on that a little bit?
Sandeep Mahajan: Behzod, first of all, thank you very much for giving me this opportunity. I've heard a lot about you and about the platform that you are running, and you're doing a great service to the people here interested in the topic of development.
The blog post you are mentioning was written in reference to South Africa. What we found was that the economic returns to private investment, this is not portfolio investment, this is a real investment - FDI. Economic returns to investment had been increasing very sharply since the end of apartheid. The government had done a great job of maintaining macroeconomic stability, and, yet the private sector response was very weak. So it was a conundrum that you would expect that private investors can make more money now in South Africa, and yet they're not counting it. Investment looks at two things. It looks at returns, and it looks at risks. In South Africa, while the returns had gone up, the risks had gone up even more. So that offset - the returns investors could expect to make in the country, basically explains why the private investment was not responding to that opportunity.
Hoshimov: Can we take your model about risks and returns, which I think is quite consensual. I think many people would agree that if the returns are high, but the risks are commercially high, then there is no point in saying that returns are high. And one thing I think about quite a bit about Uzbekistan is how high the returns are here. If you go to a commercial bank and you deposit your cash even in U.S. dollars, I think you can get something like 5-8% return, which is basically riskless because it's almost insured. If you go to the U.S., for example, and you want to deposit money to a local bank, I think half percent would be a steal, like nobody would give you half percent even if you put a million dollars, it's like an arbitrage, right? Banks could borrow from places where the returns are low and invest in high places, but that's not happening. How would you explain that risk premium? In South Africa, I'm quite undergrad in that, but I think it was also security issues and it's not very safe place, I would say. But Uzbekistan is quite safe. How would you explain that?
Sandeep Mahajan: Two countries are very different. You're right. Security was a big concern there. The legacy of apartheid is a big issue there. Transportation costs are very high. I think Uzbekistan is a different case. The policy environment we see here is very positive. When I compare the growth rates in Uzbekistan and South Africa. Uzbekistan does much better. There's far higher growth rate here than what you had. So, there is a convergence happening in that sense. But you're right. The risk factors are there and policies changing. I think the investors though, to some extent, have a watch and weight that they want to see how policy plays out. They want to see where it'll stabilize before they make their investment decisions. And I think partially there's also the case where saves when they're looking at saving opportunities in banks they're looking for a longer track record. There is a history of mistrust towards the formal financial sector here. It will take time to overcome that.
Hoshimov: But if you go to the informal sector as well, the rates of return, there are also quite enormous. Growth of say 20% a year is quite conservative numbers. If you talk to people, some businesses grow like three digits a year, which is, you know, quite crazy. But if you look at the sort of aggregate numbers, like say FDI in a year, like let's talk about pre-pandemic years, even in pre-pandemic years, the maximum FDI that we got in our history, basically, was comparable to that of Georgia, which is, you know, 10 times smaller country, which 30% of it is occupied by a foreign force. It's a very different place. The absolute numbers are sort of incomparable. I don't know how to think about the condo, meaning like, you know, we are basically starving for cash and the market is not supplying it. I want to know, what's your take on this?
Sandeep Mahajan: So, you know, let's break it down. The savings rate Inba is down at 25% or 26%, the investment rate is about 32%. There is a saving-investment gap that you need to fill. Part of it is getting filled by FDI. I think the government is doing a good job in being able to borrow in international debt markets as well. But I would say 25% savings rate is pretty good. I think in 2008, there was a growth commission report. They looked at the example of all the successful countries that had been able to maintain 7% growth over a period of 30 years. I think they came up with a list of seven countries or so. One of the characteristics they identified for maintaining a strong growth over a long period of time were high savings rate and investment rates.
The minimum savings rate was 25% to be able to maintain high growth rates. Uzbekistan is starting from a good strong base in having a savings rate of 25%. Maybe it could be increased to 30%, 35%, but you're right. I think it's important to get foreign investment as well, not just for the money, which is important to fill the balance of payment gap, but more for the technological benefits and the managerial benefits and the markets it opens up when you get that kind of investment.
Now to your question, why FDI is relatively low and sluggish. It's pretty normal. When you look at countries across the world, there's a lag between when you start reforming and when the investment starts reacting to it. Investors always will wait a little bit to make sure that the reforms are going to be consistent and they're going to be stable and they're there to stay, and it's not going to change.
Having said that, I think, there is a good response that we see in some sectors in Uzbekistan, in agro-processing for sure, where investors are starting to come in. That’s the way to build the success for future by doing well in the sectors where investment is coming in, you show a good track record, you show good returns for those investors, you show good outcomes. Outcomes are very important. So job creation, exports, and all that, which will then create a positive dynamic for more investment to come in.
Hoshimov: I share your optimism about the country but also want to hear your take on the price of capital. Typically, when we think about returns and investment, that's the price of money, right? I think if you put the supply on the man head here the high price of capital that we see has to do with not sufficient supply of the capital.
It's so extreme that if you are an agro-processing firm, which works in Uzbekistan versus if you're the same firm that does exactly the same thing, and you go 10 kilometers from Tashkent, which becomes Kazakhstan, price of capital is dramatically different. You can see one firm from another firm, not too far. You can go to a border and it's almost the same type of people who live on both sides of the border. I mean, they all, look the same, same climate, there aren't too many variables, except a social construct called “border”. That’s the thing I think quite a lot about. The convergence is not happening even within sort of a region. How would you think about that?
Sandeep Mahajan: I think that's a very good observation. So I would say two things. One, I think the cost of capital is high because inflation is much higher in Uzbekistan.
Hoshimov: But in dollars though…..
Sandeep Mahajan: So let me ask you this, what is a dollar borrowing rate or lending rate in Uzbekistan, would you know?
Hoshimov: I think, it's above 7%. So it's 10. I mean, it depends on how do you borrow. Like if you borrow informally it's 12 to 18%.
Sandeep Mahajan: I would say it's not very high. Typically, if a company can get 3-4-5% borrow cost, that's really good. Yes, it can be lowered, but I wouldn't panic based on those numbers.
Hoshimov: But it's like fully collateralized - the way to get borrowing in dollars. Right now, I think the government doesn't want us to borrow in dollars for exchange risks and stuff like that. They're thinking, if the firm doesn't have revenues in dollars, they don't want them having for its exposure. It's kind of a smart thing to do. I think borrowing from most Uzbek banks is almost, (again, it sounds like quite riskless), you have to collateralize quite a bit and it's almost guaranteed that they will get their returns back.
Sandeep Mahajan: When I mentioned that the savings rate is 26% and investment and 32%, not all the savings rate is being intermediated into an investment because the financial interaction right now is still weak. The banking sector is still dominated by the state, the private sector banks, and the risk methodologies are staying still being developed. You're comparing Kazakhstan, which has a more mature system, which has been in place for a longer time where banking relationships have been in place for a longer time. As you know, these interest rates and these boring costs go down as you have a record of the relationship between banks and companies. Another aspect of it, is obviously competition in the banking sector, right? If you have a semi-monopolistic and oligopoly system, they will go for captured markets where the returns are safe, they will not go for more risky investments. So more competition, more private banks coming in. They'll be much more entrepreneurial.
Hoshimov: Let's talk about trade. That’s one of the things that you are interested in, and I write quite a bit of op-ed and stuff about trade and why I do that. It's not because I like to think about the trade all the time. I was almost forced to think about it because Uzbekistan is a double unlocked country in which all of our neighbors are also unlocked countries, which is quite unique in the world. It's probably the only place except probably Lightenstain but it's in the European Union, so they don't have borders. This means the transport costs are high. On top of that, we have these bureaucratic costs which are quite high. They used to be some ratings that sort of ranked that bureaucratic costs. On top of that, we have very high tariffs comparable to our neighbors.
On top of that, we are not part of the WTO and we're not part of many other treaties and trade agreements, which makes our country almost like a textbook, all Turkey example in the modern world. I mean, the modern world is different from the world for a hundred years ago before the trade and stuff. It is quite antarctic. But although we are far away from this free trade equilibria, people both in the government and also in the public sphere are very much against opening up the trade. Let's talk about each of those things, like bureaucracy, transport costs, and tarrifs separately, then how they affect growth and then we'll go to the political economy of it. How do you think about trade?
Sandeep Mahajan: So I would characterize it a little bit differently than what you have. I think there are still some ways to go, but I would also recognize the very strong progress that's been made since 2017. Uzbekistan used to be an authoritarian economy. It's no longer. At that point, the average tariff rate was 15%. Today is actually fallen by half. So it's seven and a half percent. The country has submitted an application for WTO access, which I think is a very significant move because it ties in Uzbekistan to a very important process of committing itself to trade openness. But I think you touched upon a really important topic. Trade openness is extremely important for any country, but a country like Uzbekistan, which is 30 million people, 60 billion GDP you know, especially when you measure it against the growth objective of the country. When you want to grow at 10% a year, which is the objective that you see in Uzbekistan. Then export orientation, trade orientation is necessary condition for that.
When you look at the countries which have been able to grow at that rate, whether you look at Korea, Vietnam. Even China, which is actually a really large country and a large market has relied on export markets, and that's gonna be very important for Uzbekistan. I think there's the hurdle of double unlockedness, which has to be overcome, but it's not insurmountable. If you look at some of the hot culture exports that Uzbekistan has been making all the way to South Korea or Germany it's not insurmountable. Transport cost is, I would say 5% of the total cost. It's something where it puts you at a disadvantage, but you can make it up by being more competitive in other ways.
Hoshimov: But if you go out and say to people that exports are good as a general euphemism. I wouldn't say you find a lot of people who disagree with that. Although the government have been, and still does limit exports in some things, they think that if we let some of the agriculture be exported, the prices in the local markets will rise and it will make people unhappy and so on. They occasionally sort of close borders, but overall since 2017, as you noted this isn't happening as much as it used to. But one thing I'm quite worried that bad is that although people think experts are good, they think imports are bad. In that sense how would you think about persuading people that in-person exports almost exactly the same thing there are symmetries between them and, and you can't really grow exports with, while limiting imports? It's mathematically impossible. I have trouble communicating that. How would your take be on that?
Sandeep Mahajan: I would say exactly what you said. That you cannot have exports without imports. Just to be able to export you need intermediate goods and raw materials that you have to import. That's part of the whole global value chain, and you have to be part of the global value chain. In fact, one of the benefits of exports is that gives you the foreign exchange to be able to import.
Hoshimov: One of the main purposes is to get money.
Sandeep Mahajan: It also makes the companies more competitive because they have to compete outside and it sharpens their competitive edge. But as Uzbekistan develops, there is going to be a need for a lot of capital goods, a lot of capital investment, and a lot of those capital goods have to be imported. There's nothing wrong with that. Every successful country in the world has done it. So why not Uzbekistan, if it gives you high growth and jobs which is the objective of the country.
Hoshimov: Yeah. So that’s something I think about quite a bit and one conclusion I came across was that if you open up the trade there will be winners and losers obviously. Then those who lose are much more concentrated than those who win. Right? If tomorrow the government lifts the ban on I'm calling it “ban”, but it's actually a tax. One thing about you just mentioned earlier about 7.5% average tariff. This is sort of something that we observe ex-post, not ex-ante, meaning, some things have such high tariffs that are not calculated in the average, because, you know, the average is calculated, once it makes sense to bring like some goods it was ridiculous. Like some ice creams were like 300% tax rate.
Sandeep Mahajan: Water in tariff.
Hoshimov: In tariff. Yeah. So, so that, that sort of tariffs I mean, how can I say it basically prevents imports, which makes the average tariff look meager. And I think I don't know a good way actually, of measuring tariffs, because if you measure it by, you know, number of goods and then tariff rate, the average is uninformative. If you do the weighing by ex-post imports, it is also quite uninformative because it is sort of endogenous to what people are importing. I mean, if you put them too high, nobody's gonna import that. That thing will not captured in in the average, I don't know how to think about it properly, but again the political economy of it worries me. And I want to hear your take on how we should think about it. Because people don't really care. I mean if sugar will become 1 cent cheaper, but people who are making money on the sugar tariffs care a lot about it.
Sandeep Mahajan: It's a tough question. I mean, this is good, this is a question that even in the U.S. is struggling with that. A lot of industries have suffered because of trade liberalization, because it's good for the country, but it's bad for some groups. How do you handle it? I think the economics profession has been behind on this so far you always hear in the economics profession. Yes, you have to take care of the losers. You have to have transfer or distribution or something. But in practice, you don't see that happening. So I would say that having a system of social protection, which actually addresses the losers from reforms - is very important. That has to be one of the preconditions for making the reform happen and being recognizing that that's an issue.
Part of this support for the losers in the reform has to be also to retrain in them for the moving to the opportunities that are going to open up. So it has to be thought about comprehensively. But it's a tricky issue. I agree with that. Because as you said, the political economy is very challenging as well because the losers are concentrated because they have a lot to lose per person. The winners are diffused. So their incentive to come together is much less than the winner's incentive to come together. You know, this, these things have to be, have to be carefully managed. So don't, you know, it's difficult to do anything. Very certainly now this is where the Vietnam experience by the way comes, becomes relevant, where every reform, including our trade liberalization, but privatization, everything had a lot of consensus building in the system, where everybody's views were taken to account. And the speed of the reforms was conditioned by consensus building. So there's nothing wrong in building census and making sure that you have enough consensus enough people behind their reform to build momentum and to make it stay so that, you don't have to reverse reforms later on.
Hoshimov: How do they build consensus? Like was it, they liberalize their political sphere? How do they do it?
Sandeep Mahajan: So they have a complicated system. It's a communist country. Yeah. But the communist party itself has a very diffused power. It’s a very decentralized communist party where local branches of the communist party also have a lot of sways. So across the communist party system building consensus, not, it's not something that one person decides. It's something that the party itself decides and building consensus within the party is a very elaborate process. Because people come with their own views and those views are, you know, aired within the system. Only when the consensus is built across the whole system, do they go forward with the reforms,
Hoshimov: You foreshadowed one of the questions that I wanted to ask you, it's again about hard reforms: the reforms that are necessary, but not popular. One of them was a lot of things in Uzbekistan were underpriced. And I personally took it as my sort of duty to write about it in the public sphere and part, for example, I wrote about that the price of gasoline is underpriced, and we used to have lines and they sort of liberalized it. And a lot of people understand about “liberalization” that things will be more expensive. Reforms mean things are gonna get expensive. One thing that is very important right now is the price of energy - electricity, you know and other sorts of utilities: water, gas and so on. They're all underpriced. We as a society spend an exuberant amount of money subsidizing our energy. I think this is quite bad because, it's quite regressive, right? People who consume more tend to be richer if you consume, but, but when you talk about it, you sound like a ridiculous person who says like, people should suffer. Meaning like, if you go out and say tariffs you know, our electricity underprice, people will like jump on you saying, like, how can you say, so our, our incomes are so low, but what I really meant is for example, that we spent more on electricity sub-cities than we spent on education or right. Or other things. It's so politically unpopular that nobody wants to deal with it and it sort of gets exacerbated. So how would you think about, you know, talking about those things without bearing the political costs, do you think, we should compensate them with cash? How would you think about it or design those policies that are necessary, in my opinion, to move the country forward, but politically costly?
Sandeep Mahajan: Again it's a complicated, complex policy matter, but I think you're absolutely right, that a lot of the subsidy actually goes to people who don't need the subsidy. Who are, you know, well off, and continuing that subsidy is regressive. So it doesn't make any sense, to do that right now. How do you build a system where you still protect the poor people for whom it's a big deal to pay more for heating, energy and all of that. At the same time not do it for the rich. So typically, it's very country-specific, but typically what you would see is that you would have to raise energy prices to cost-plus at least recovery of cost. At the same time, have some form of social protection where well-targeted support for the poor, either through cash transfers or through some basic level of tariff where people below a certain income level pay lower tariffs and above pay higher would be the way to go.
Hoshimov: So let me tell about one experiment, which is, was quite a niche in Uzbekistan.
Sandeep Mahajan: It's called a social tariff, by the way, that up to like 150 or 200-kilowatt hours.
Hoshimov: That's exactly what they did. So in one of the districts in Tashkent, the price of the electricity with a sub-function in which if you consume less than 300, you pay less. If you consume more than 300, you pay a lot. And I think more and 90% of the households in that district consume less than 300, but if you looked at the after 2017, we got 300 is very high, it's extremely high. Exactly. Because, you know, one thing I thought at that time, especially at that time with the price gasoline and the price of electricity was that most of the country was experiencing severe shortages of both electricity and, and the gasoline, people used to have diesel generators to just put electric in their homes. They had electricity for a couple of hours. But having said that the price of non-existent electricity still is going up and people are furious about it. There should be a way of doing it because you know, it can't be sustainable when you spend so much of the public funds such on extreme regressive measures.
Sandeep Mahajan: No, I agree with that. But again, I will go back and say that if the only thing you're doing is making people pay more. That's not gonna work. But if at the same time, if you're also working on the supply side, bringing in more competition, and making the supply side more efficient and better, you're going to help the reform process
Hoshimov: Shift our gears a little bit and talk about size in the scope of the government. So one thing I always sort of wanna emphasize is in both stocks and flows, the share of the government is really high. I'm worried more about stocks than flows. Flows are also problematic, but stocks are where I think the main problem is. So how should we think about privatization? What do you think are potential, you know, challenges that may arise with privatization? and how should we make it sort of inclusive in a way that a lot of people will buy-in, if you will, like, you know, we just talk about commodity prices. A lot of people are not buying into that reforms, how to make people sort of buy into privatization?
Sandeep Mahajan: So you are right. I think the presence of the state is pretty large here. When you look at the size of the budget, implicitly or explicitly, the government spends about 35% of GDP, which for this income level is quite high. And then when you include the role of the SOE, you know, 50% of GDP is accounted by the state. And almost 20% of employment is right, which is large. That's a starting point and you wanna start moving away from it because you wanna start redefining the role of the state. The role of the state is gonna remain important by the way. I disagree with people who say less government and more private sector. I would say there's a very important role for the private sector. And there's a very important role for the, for the government.
It's a question of defining it. Now so far as privatization is concerned, it has to be done right. There are a lot of examples in the world where this process was rushed and the outcomes were not good because the market institutions were not in place and you privatize. What you got, in the end, was a lot of was basically private oligarchic structures, which is not what you want, right? You wanna, you wanna make sure that you get a comparative outcome in the end. You also wanna make sure that you do it in a way that you get good outcomes. The one outcome that you need in Uzbekistan today is privatization, private participation is gonna be very important for that is jobs. Unemployment in Uzbekistan is very high. It's in double digits and you wanna make sure that privatization is an important instrument for job creation. Let me give you one more example from Vietnam. Now Vietnam, you know, still has a lot of state-owned enterprises, but they've been privatizing for the last 15, 20 years.
But, one strange phenomenon we found in Vietnam was that the average productivity of the private sector was lower than the average productivity of the public sector. So it's not good enough to go from public to private when your private sector is not performing. That’s because they were not doing as well, in building the market institutions to support the private sector. I think that's something to watch out here that you wanna prioritize, but to a private sector, which is a strong performer, is a stronger performer than the public sector. It creates jobs, it creates employment. It creates export as well.
I think the government is discussing these things. There's a, you know, the laws being framed along these lines. It is an incremental approach. It's been four years, the privatization can, you know, we would like to see a little bit more push on that. but I wouldn't crush the process either. It'll be a great thing to start with the smaller companies to privatize little, you know, two people shops that there's no reason for the government to be running garages for example. Right. So yeah, I mean, start with that
Hoshimov: Bookstore is government-owned, by the way.
Sandeep Mahajan: So that's another example, right? So we got 2,800 SOE right now. I mean, a lot of them are gonna be small mom-and-pop kind of SOE to privatize them. But the bigger ones, I think you need to be more de deliberate that you are attracting the right kind of private investment.
Hoshimov: But even in privatization, there is a political economy lens because although it's not like an oligarchy right now, people who serve, operate, and work in SOE get skewed benefits, and they wanna preserve the status quo. I'm talking about things like transportation, for example, if you fly to Uzbekistan from anywhere in the world, you know it's very expensive. I mean, it's much more expensive than any in the region as well. Although it's quite a large country, it's quite a large market in terms of like just airlines, the railroads and so on and so forth. You see that people who sort of work for those, say those enterprises, their justification comes like, oh, we have so much employment. So we wanna, keep the airlines working. That's why we'll force our competitors, even the foreign firms to keep the prices high so that we're not out of business. If there is a political will to privatize, and then I think if we are slow, then the concentrate that losers, potential losers have will have a lot more time and effort to build up the momentum, to stall the reforms. I saw this quite a bit of time in our recent history. So I don't know how to think about rapidity. Like sometimes I feel speed it important. And the answer is probably kind of coming to yes, but I'm, I mean, you know, the jury is allowed. I'm open if you like to persuade me that no. Should go slower.
Sandeep Mahajan: So speed is important. You wanna have momentum in it, but you only privatize once you don't privatize 10 times. you wanna do it right as well. I mean, you don't want to hand it over an airline business to people who don't know how to run an airline business. You don't want to hand over airlines to somebody running a banking sector, for example. You want to make sure that you're doing it right. But again, it goes back to the point we were discussing earlier that the question of winners and losers has to be thought through carefully. I mean there will be job losses in sectors when you implement reforms. I think thinking of packages for losers is not a bad idea, as long as it helps you promote the reform. But the larger good has to be kept in mind as well. In the case you just mentioned, the consumers in Uzbekistan are paying for rents in one sector, which is preventing job creation in other sectors, right? So it's an important reform.
It has to be done, but it has been done carefully.
Hoshimov: Let me talk about one specific thing about the way World Bank operates. I want to know how does it work, the inner kitchen of it. We know that developing countries should discover their competitive advantages and the external parties, like the World Bank, they fund sometimes specific projects in specific industries. Don’t you think it's kind of preventing the market to do its magic in a way that people who are in DC or Tashkent office with all the respect or whatever, they decide where to allocate the investments and not the market. How would you think about that?
Sandeep Mahajan: I think that's a very good question. It's a very fair question. So our operating principle now, whether or not we implemented perfection. But our operating principle is that where does a competitive market, where the private sector can do the job is not an area where we want to get in. We only get in where we think there's a market failure, where we think that either the cost of private financing is exorbitantly high or it's not there at all. Through our participation, we actually open the ground for future private investment in that sector. It is the way I would see it. Now, the market failure could also be the social returns, could be much higher than the private returns
Hoshimov: Like education or something?
Sandeep Mahajan: It's a great example. Where private investment is often reluctant because the private returns are not as high as social ones. This is where we find a niche for ourselves because we think that social returns are exceptionally high.
Hoshimov: I see. So why I'm asking this question is one of the sectors that employ a lot of people in Uzbekistan, but it's also very unproductive, is agriculture. Almost half of the population is rural and a lot of people are supposed to be working in that sector, but it's extremely unproductive and it's very command economish. Farmers basically can't decide for themselves what sort of crops they would produce. I need to be very careful with sort of what I say now. How does the agricultural command economy works here is from Tashkent every region will get orders of specific commodities or goods to be produced. In the local governments or local governor's office would give to the local farmers what they have to produce.
If they don't produce, government has a lot of leverage over them, up to the point that they would take away their lands because there is this rental agreement between the farmer and the government for 50 which government routinely breaks the contracts and saying like, ‘oh, we told you to have to get us wheat, but you're planting tomatoes. So good luck with that.’ You don't need even a court order. You don't even need the prosecutor's order basically for that. The way that farmers operate there is basically like in a communistic state and the World Bank is very involved in agriculture. If I would criticize the World Bank, people would say the fact that this not only World Bank, by the way, many international financial institutions, and even the charity institutions and NGOs and whatever they're involved in helping with the productivity of the agricultural sector, by which they exacerbate the process in which the government still keeps it. There’s incremental help they get, and they never wanna let it go because they get this technical assistance. They get some funding to keep the show rolling. So how would you think about that?
Sandeep Mahajan: So let me preface anything I say by saying I'm not an agricultural specialist. I mean, you know more about agriculture than me.
Hoshimov: No, I know a little bit about Uzbekistan only.
Sandeep Mahajan: When you said agriculture in Uzbekistan is very unproductive, which may be true. I mean, it needs to be more productive, but we are economists. So I'm gonna give you some numbers. When I look at Vietnam, which is a higher income than Uzbekistan slightly, it has gone through a transition process as well. 40% of the work works in agriculture producing less than 20% of GDP. In Uzbekistan one-quarter of the workforce works in agriculture producing one-quarter of GDP. So it is a more productive scenario here than in some other countries. The picture you painted shows that there is a long way to go. But I wouldn't say that the changes have been incremental. A lot of the changes have happened in agriculture and we can talk of what more needs to happen, but a lot of the changes are not incremental. The role of the government in deciding what the farmers produce, how much they produce, and what price they sell has been shrinking dramatically. The pricing farms get sales have been liberalized to the extent. I think the next step probably is going to be where all farms get the farmers , will be free to sell to whoever they want. Now one remaining issue is how much land is allocated to wheat and cotton. Almost 70% of the land is still allocated to wheat and cotton. I think that remains an issue. It's been decreasing, but obviously, that needs to be accelerated, so farmers can get more, get more income.
Sandeep Mahajan: Farm get sales have been liberalized to the extent I think the next step probably is going to be where all farm get at the farm, get the farmers will be free to sell to whoever they want. Now one remaining issue is how much land is allocated to wheat and caught almost 70% of land is still allocated to Wheaton cotton. And I think that remains an issue it's been decreasing, but, obviously, that needs to be accelerated, so farmers can get more income.
Hoshimov: When we talk about the scope of the government what I rather really meant was sort of political constraints to the governmental power. If the government makes a contract with the farmer for the 50 years of usage of the land and but also, government at every level has this leverage on like, oh, we can take away your land. Yeah. If we wish. So that's a big issue.
Sandeep Mahajan: Yeah. I agree. It's not that they do it. It's just like the existence of it. Sometimes they do it too, by the way.
Hoshimov: What I'm saying is it's bad, even if they did it occasionally.
Sandeep Mahajan: Got property rights. The security of land ownership or land use is very important for farmers to put the long term investments that they need to put in to get more productivity. I think it's a critical reform. It's a very critical reform. My sense is that the government is actually taking it seriously. So hopefully we'll see results in the coming years
Hoshimov: How does this relates to the World Bank's business? I know that in some industries like livestock or animal producing as so on World bank does investments in Uzbekistan. So do you think there was a market failure that World bank gets involved in this?
Sandeep Mahajan: Usually you are now drawing me out into areas which are beyond my competition. So I won't be able to get into that level of detail.
Hoshimov: So how do you think of this? I hear it a lot. And especially in the post-Soviet countries, there is this vilification of this so-called Washington consensus, which I'm not sure it exists as a model, but almost everybody knows what it generally means. Like a freer trade, better property rights, independent central banking. It’s a laundry list stuff, which in my opinion, is quite sane. I don't feel like I particularly hate that Washington answers, but if you read especially Russian blogosphere and press, there's a lot of vilification of it. How would you think as a person who works for the World bank and to whom who represents that Washington consensus in the eyes of, I think a lot of people Inba as well? I think the main argument that people don't like about international financial institutions is that they help you to reform the economy, but they conflate the economic reforms with the liberalization of the political sphere. Do you think they really go hand in hand and do you think that the World bank cares about it?
Sandeep Mahajan: Okay. So you threw a lot of questions at me. There one is Washington consensus, and one is political reforms together with economic reforms, which is not the same thing. Washington consensus is very maligned because it's also misunderstood. As you also alluded. Washington consensus means, liberalizing prices, macroeconomic stability, there's nothing wrong with it. But it was never devised as an instrument for all to develop. It was devised in the context of the Latin American debt crisis in the 1980s for macroeconomic stability. I would argue that these principles are still important for macroeconomic stability, but I would say these are macroeconomic stability through these principles is a necessary condition for development, but not sufficient. If all you do is the Washington consensus and stop at that, then I think you will not get necessarily good results. This is one step towards, but there's a lot of supporting institutional reforms that need to go with it.
Hoshimov: I think that the way they define Washington consensus is also political. As you said, the actual Washington consensus is quite maligned and it's not an extreme way of saying things, but the Washington consensus that people define in this part of the world is like, these foreign institutions, like the UN and so on, they have their agenda of development, helping and education. But also they want liberalization of the political sphere. I don't agree with it, but just wanna hear your take.
Sandeep Mahajan: I wanna clarify that in our charters, we don't get into the political reforms. We work with the political systems that are in place. We've been working in China for 40 years. With the political system they have in place, we have been working in Vietnam or India. I mean, they're very different political systems.
Is no precondition in the kind of political system we can work with. We work in all kind of political systems within those systems respecting the norms of those systems and political reforms is not something that we get into as an institution. We get into economic reforms, we get into development issues, but not reports.
Hoshimov: The World Bank thinks… If you go to their office or if you go to their website, they talk about eliminating poverty and thinking about poverty. Have you looked at the poverty numbers in Uzbekistan? And do you think like Uzbekistan is being challenged by poverty or we are like already sort of graduated from that?
Sandeep Mahajan: Uzbekistan, I think confirms the analysis that we see at the global level, which is that the strongest force for power de reduction is economic growth. Economic growth, despite the limitations in Uzbekistan, has been strong in the last 20 years. And, we've seen it in the poverty numbers, the poverty rate. I don't have the exact numbers with me, but it has fallen from the high twenties to something like 10%. So over the last 20 years, poverty has been reducing. One impediment to poverty reduction, even faster poverty induction is what I had mentioned before, which is the progress on job creation has been very slow and that has to change. I think the job creation part, more employment, better employment is gonna be very important for the gains in poverty reduction.
Hoshimov: I see. Let's say you can implement one reform that you think has the highest bank per buck in Uzbekistan that you understand so far. What do you think it would be? Would it be liberalizing trade, would it be liberalizing commodity market prices and energy? What would be your one policy thing?
Sandeep Mahajan: I think it's a very difficult question because when you look at some economies, you see that there is one distortion, everything else is in place, but there's one distortion, which is creating low growth or in Uzbekistan especially in a transition process. I think one reform is not gonna do it because there are so many complementarities that have to happen on the financial sector because you need credit, you need de licensing, you need export reforms because you need markets. So it's very difficult to identify, but if you ask me where I would really like to see progress in the next couple of years, not at the cost of everything else, by the way, because everything else is important too. I would say agriculture, I think because that's the core strength of Uzbekistan and that's where also you've seen really good results in the last three, four years incomes have gone up a big impact on poverty reduction, good export response. I think there's a lot of potentials there. That has to continue. So related to that land reforms. You're not gonna get more agricultural productivity until you have reforms on land market liberalization along the lines we discussed earlier.
Hoshimov: It's a really interesting conversation. I think we're almost at a time. Thank you so much for being our guest. It was a very interesting talk.
Sandeep Mahajan: It is my pleasure.
Hoshimov: There's a lot to unpack here and I'll look forward to talking to you more and thinking about what you have said. Thanks a lot!