Supporting Uzbekistan's Development Strategy in Key Policy Areas: Industrial Cluster, Cyber Security, S&T, and Insurance

2015/16 Knowledge Sharing Program with Uzbekistan

2015/16 Knowledge Sharing Program with Uzbekistan: Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Special Economic Zone, Industrial Development, Public Budgeting and Postgraduate Education 2015/16 Knowledge Sharing Program with Uzbekistan 2015/16 Knowledge Sharing Program with Uzbekistan

Project Title Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Special Economic Zone, Industrial Development, Public Budgeting and Postgraduate Education

Prepared by Korea Development Institute (KDI)

Supported by Ministry of Strategy and Finance (MOSF), Republic of Korea

Prepared for The Government of Uzbekistan

In Cooperation with Ministry of Foreign Economic Relations, Investment and Trade of the Republic of Uzbekistan (MFERIT) Ministry of Finance of the Republic of Uzbekistan (MOF) Institute of Forecasting and Macroeconomic Research (IFMR)

Program Director Siwook Lee, Executive Director, Center for International Development (CID), KDI

Program Officer Nu Ri Leem, Research Associate, Division of Policy Consultation & Evaluation, CID, KDI

Senior Advisor Bong Kyun Kang, Former Minister of Ministry of Finance and Economy (MOFE)

Authors Chapter 1. Siwook Lee, Executive Director, Center for International Development (CID), KDI Mutalib Hojimurotov, Head of the Coordination of Free Economic Zones Division, Ministry of Foreign Economic Relations, Investment and Trade of the Republic of Uzbekistan (MFERIT) Chapter 2. Changik Jo, Professor, Hallym University Hoon Heo, Research Associate, Center for International Development (CID), KDI Saidjon Kodirov, Chief Economist, Ministry of Finance for the Republic of Uzbekistan (MOF) Otabek Fazilkarimov, Chief Economist, Ministry of Finance for the Republic of Uzbekistan (MOF) Chapter 3. Jong ll Kim, Professor, Dongguk University Zulfiya Asfandiyarov, Senior Researcher, Institute of Forecasting and Macroeconomic Research (IFMR) Sanjar Karimov, Junior Researcher, Institute of Forecasting and Macroeconomic Research (IFMR) Chapter 4. Seul Ki Choi, Professor, KDI School of Public Policy and Management Doniyor Djunaydullaev, Head of Project, Institute of Forecasting and Macroeconomic Research (IFMR)

English Editor Green Service

Government Publications Registration Number 11-1051000-000690-01 ISBN 97 9-11-5932-122-1 94320 979-11-5932-117-7 (set) Copyright ⓒ 2016 by Ministry of Strategy and Finance, Republic of Korea Government Publications Registration Number

11-1051000-000690-01

2015/16 Knowledge Sharing Program with Uzbekistan: Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Special Economic Zone, Industrial Development, Public Budgeting and Postgraduate Education In the 21st century, knowledge is one of the key determinants of a country’s level of socio- economic development. Based on this recognition, Korea’s Knowledge Sharing Program (KSP) was launched in 2004 by the Ministry of Strategy and Finance (MOSF) and the Korea Development Institute (KDI).

KSP aims to share Korea’s experience and knowledge with the partner countries to achieve mutual prosperity and cooperative partnership. Former high-ranking government officials are directly involved in the policy consultation to share their intimate knowledge of development challenges, and to complement the analytical work of policy experts and specialists who have extensive experience in their fields. The government officials and practitioners effectively pair up with their counterparts in the development partner countries to work jointly on pressing policy challenges and share development knowledge in the process. The program includes policy research, consultation and capacity-building activities, all in all to provide comprehensive and tailor-made assistance to the development partner countries in building a stable foundation and fostering capabilities to pursue self-sustainable growth.

In 2015, policy consultation and capacity building workshop were carried out with 26 partner countries covering over 100 research agendas. As a new partner, Nicaragua and Visegrad Group were selected in consideration of the country’s policy demand, growth potential, and strategic economic partnership.

The 2015/16 Knowledge Sharing Program with Uzbekistan was carried out with the aim of exchanging socio-economic development experience of two countries for improving Uzbekistan’s policy making capacity and achieving her socio-economic development. Under the active cooperation between two nations, the joint research and seminars were conducted in order to support the establishment of “Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Special Economic Zone, Industrial Development, Public Budgeting and Postgraduate Education”.

I would like to take this opportunity to express my sincere gratitude to Senior Advisor Mr. Bong-Kyun Kang, Project Manager and Executive Director of CID Siwook Lee, as well as the project consultants including Prof. Changik Jo, Prof. Jong Il Kim, and Prof. Seul Ki Choi for their immense efforts in successfully completing the 2015/16 KSP with Uzbekistan. I am also grateful to Executive Director Dr. Siwook Lee, and Program Officer Ms. Nu Ri Leem, and all members of the Center for International Development, KDI for their hard work and dedication to this program. Lastly, I extend my warmest thanks to the Uzbekistan counterparts, the Ministry of Economy, Ministry of Foreign Economic Relations, Investment and Trade, Ministry of Finance and Institute of Forecasting and Macroeconomic Research, program coordinators, and participants for showing active cooperation and great support.

In your hands is the publication of the results of the 2015/16 KSP with Uzbekistan. I believe that KSP will serve as a valuable opportunity to further elevate mutual economic cooperation of Uzbekistan and Korea to a new level. I sincerely hope the final research results on the selected areas could be fully utilized to support Uzbekistan in achieving economic development goal in the near future.

Joon-Kyung Kim President Korea Development Institute 2015/16 KSP with Uzbekistan ·················································································································· 014 Executive Summary ·································································································································· 017

Chapter 1 Improving Investment Climates and Export Performance in the Navoi FIEZ

Summary ··················································································································································· 024 1. Introduction ·································································································································· 025 2. Current Status of the Navoi FIEZ································································································· 028 2.1. The Navoi FIEZ: Overview ································································································· 028 2.2. Advantages of the Navoi Region as a FIEZ Location ······················································ 031 2.3. Framework and Incentive Systems of the Navoi FIEZ ····················································· 033 2.4. Current Situation and Performance of the Navoi FIEZ··················································· 047 3. Survey Analysis Targeting Resident Companies in the Navoi FIEZ ············································ 054 3.1. Overview ··························································································································· 054 3.2. Survey Results ···················································································································· 055 4. Policy Evaluations and Recommendations·················································································· 062 4.1. Policy Evaluations·············································································································· 062 4.2. Policy Recommendations ································································································· 070 References ················································································································································ 079 Appendix ·················································································································································· 080 Chapter 2 Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure Effectiveness in the Republic of Uzbekistan

Summary ··················································································································································· 090 1. Introduction··································································································································· 093 2. Budget Process of Korea: Concepts and Framework ································································· 095 2.1. Conceptualization of Government Budgeting ······························································· 095 2.2. Legal Framework of Korea’s Budget Process ·································································· 098 2.3. Budget Process in Korea: Formation and Execution ······················································ 100 2.4. Budget Management Methods ······················································································· 103 2.5. Health Financing System in Korea ··················································································· 114 3. Analyses of Uzbekistan Cases ······································································································ 117 3.1. Overview of Uzbekistan’s Budget Process······································································· 118 3.2. Budget System Legislation ······························································································· 120 3.3. National Budget System ··································································································· 120 3.4. State Budget System ········································································································· 121 3.5. Preparation, Consideration, and Approval of the State Budget ··································· 123 3.6. State Budget Revenue and Expenditure Management ················································· 126 3.7. Supervision over State Budget Administration······························································· 126 3.8. Reports on Implementation of the State Budget ··························································· 127 4. Healthcare in the Republic of Uzbekistan··················································································· 128 5. Policy Suggestions and Conclusions····························································································· 136 References ················································································································································ 139 Chapter 3 Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile Industry Strategy in Uzbekistan

Summary ··················································································································································· 142 1. Introduction··································································································································· 144 2. A Brief Introduction to the Textile Industry················································································ 149 2.1. Textile Industry Characteristics························································································· 149 2.2. Textile Industry Global Value Chain ················································································ 150 2.3. Recent Evolution of the Textile Industry ········································································· 151 2.4. Cotton Textile Industry Value Chain················································································ 152 3. Uzbekistan’s Textile Industry········································································································ 154 3.1. Overview of Uzbekistan’s Textile Industry ······································································ 154 3.2. SWOT Analysis of the Uzbek Textile Industry ································································· 158 3.3. Potential for Uzbekistan’s Textile Industry Cluster························································· 162 3.4. Current Strategy and Government Policy for Uzbekistan’s Textile Industry Development······················································································································ 166 3.5. Strategy and Policy Assessment························································································ 170 4. Korea’s Experience in Textile Industry Development································································· 172 4.1. Evolution of Korea’s Textile Industry··············································································· 172 4.2. Textile Industry Promotion in Korea················································································ 176 5. Implications of Korea’s Experiences and Policy Recommendations ·········································· 182 5.1. Success Factors of Textile Industry Development in Korea ············································ 182 5.2. Implications for Uzbekistan and Policy Recommendations ··········································· 185 References ················································································································································ 193 Appendix ·················································································································································· 195 Chapter 4 Improvement of the Postgraduate Education System and Training of Research Personnel

Chronology of Legislative Acts on SEZs of Uzbekistan··················································· 035

Comparison Table of Incentive Systems of the Navoi FIEZ, Angren SIZ, Djizak SIZ and Localization Programs ······································································································ 041

Composition of Investment Projects in the Navoi FIEZ··················································· 048

Composition of FDI in the Navoi FIEZ··············································································· 049

Occupied Production Areas by Industry ·········································································· 051

Recent Trends in Production and Export of Navoi FIEZ·················································· 052

Export Volume of Major Products in Navoir FIEZ···························································· 053

Comparisons between Masan FTZ and Navoi FIEZ·························································· 064

Correlation of FDI Inflows with GDP and Investment (2000-2013)································ 067

FDI in Landlocked Countries: International Comparison················································ 068

Overall Evaluations on the Current Status of the Navoi FIEZ········································· 069

Structure of Uzbekistan’s Law on Foreign Activity························································· 077

Chapter 2

Principles of Budgetary Governance················································································ 097

Major Budget Laws in Korea ···························································································· 099

Timeline of Budget Process in Korea ··············································································· 101

A Series of Initiatives for Strengthening Budget Management ···································· 104

State Budget Expenditures to Develop Healthcare for Selected Years (2000–2015) ··· 133

State Healthcare Budgets for Health Manpower ··························································· 133 Chapter 3

World Top Ten Cotton Producers and Exporters (2014/2015)········································ 146

Light Industry Production Structure················································································· 155

Employment in Light Industry ·························································································· 157

SWOT Analysis of Uzbekistan’s Textile Industry······························································ 162

Regional Structure of Light Industry Product Production ·············································· 164

Major Incentives in the Textile Industry··········································································· 169

Korean Textile Industry’s Export Structure Evolution····················································· 174

Trade Balance by Textile Product in Korea······································································ 175

Recommended Policies for Textile Industry Development············································· 192

Chapter 4

Key Indicators of Postgraduate Education (Doctoral) in Uzbekistan····························· 211

Development History of Korea’s Graduate School Policies············································· 215

Number of Schools, Enrolled Students, and Faculty Members ······································ 216

Number of Enrolled Students, Applicants, Entrants, and Degrees Awarded ··············· 216

Age of Doctoral Students ································································································· 217

Academic Performance of Doctoral Students ································································· 218

Types of Graduate Schools that Can Confer Doctoral Degrees······································ 219

Faculty Numbers of Three Departments in Seoul National University ·························· 243 Chapter 1 [Figure 1-1] FDI Trend in Uzbekistan ·································································································· 026 [Figure 1-2] Floor Plan of the Navoi FIEZ ··························································································· 030 [Figure 1-3] Total Investment and FDI Share in the Navoi FIEZ························································· 048 [Figure 1-4] Composition of Firms by Equity Structure ····································································· 055 [Figure 1-5] Number of Workers ········································································································· 056 [Figure 1-6] Investment Options in Absence of Navoi FIEZ································································ 057 [Figure 1-7] Investment Climates Relative to Other Regions in Uzbekistan····································· 057 [Figure 1-8] Major Reasons for Sluggish FDI Inflows into Navoi FIEZ··············································· 058 [Figure 1-9] Perceived Benefits for Government Support Measures ················································ 058 [Figure 1-10] Government Policies Needed for Improvement ···························································· 059 [Figure 1-11] Export Activity·················································································································· 059 [Figure 1-12] International Competitiveness························································································ 060 [Figure 1-13] Major Transportation Mode ··························································································· 061 [Figure 1-14] Reason for Low Usage of Air Transport ········································································· 061 [Figure 1-15] Investment Trend in the Masan FTZ ··············································································· 063 [Figure 1-16] Export Performance in the Masan FTZ ··········································································· 064 [Figure 1-17] Employment Structure of the Masan FTZ······································································· 065 [Figure 1-18] Factors Motivating FDI in the Masan FTZ······································································· 066 [Figure 1-19] Uzbekistan’s Legal Framework for Foreign Economic Policy ······································· 075 [Figure 1-20] Korea’s Legal Framework for Foreign Economic Policy ················································ 078

Chapter 2 [Figure 2-1] Fiscal Structure of the Central Government ···································································· 100 [Figure 2-2] The PFS Procedures for Public Infrastructure Projects····················································· 107 [Figure 2-3] The Analytic Hierarchy Process (AHP) of the PFS····························································· 108 [Figure 2-4] Performance Management System of Fiscal Projects ······················································ 110 [Figure 2-5] An Overview of the Korean Health Financing System ···················································· 115 [Figure 2-6] The Relationship among Consumers, Health Providers and Financing Actors·············· 116 [Figure 2-7] The Organizatoinal Set Up of the Healthcare System ···················································· 130

Chapter 3 [Figure 3-1] Uzbekistan’s Cotton Consumption, Exports, and Production ······································ 147 [Figure 3-2] Apparel Value Chain ······································································································· 150 [Figure 3-3] Light Industry Output Growth ························································································ 155 [Figure 3-4] Electricity Price Ratio in the World and Uzbekistan ····················································· 159 [Figure 3-5] Indexed Unit Labor Costs in the Manufacturing Sector of Selected Countries 2000–2014 ························································································································ 160 [Figure 3-6] Production Share of Cotton Fiber by Region ································································ 165 [Figure 3-7] Conceptual Scheme of the Textile Cluster in View of Uzbekistan’s Existing Potential ··························································································································· 166 [Figure 3-8] Organizational Structure of O'zbekyengilsanoat ························································· 167 [Figure 3-9] Korean Textile Industry Trade Balance ·········································································· 173 [Figure 3-10] Techno-Park Basic Design································································································ 194

Chapter 4 [Figure 4-1] The Number of Ph.D's Defended in 2005-2012 ······························································· 208 [Figure 4-2] Age Structure of Accepted Senior Researchers in 2014 ·················································· 209 [Figure 4-3] Concept Diagram for Development of Doctoral Degree Program ································ 242 2015/16 KSP with Uzbekistan

Nu Ri Leem (Program Officer, Korea Development Institute)

The Republic of Uzbekistan is a Central Asian country bordering Afghanistan, Kazakhstan, Kyrgyzstan and Tajikistan. With a population of 31 million people, Uzbekistan is striving to become a high middle-income country by adopting a gradual export-oriented industrialization policy followed by reform of Uzbekistan’s public financing and budgeting system. As is the case with other commodity- dependent economies, the Uzbekistan government is attempting to reconstruct its economy towards a competitive industrialized one with a comparative advantage in high value-added products and services.

To support the Uzbekistan government in reshaping its economy, the Knowledge Sharing Program (KSP) has, since 2004, been conducted in the form of research and policy consultation. In 2010, the Republic of Korea’s Ministry of Strategy and Finance selected Uzbekistan as their Strategic Development Partner Country (SDPC) for three years and provided policy alternatives and more comprehensive analysis to the KSP project.

From the start of SDPC until 2012, SDPC projects were conducted on the topics of Mid- and Long-Term Plans for Promoting Innovation and Sustainable Economic Growth in Uzbekistan, Strengthening Uzbekistan’s National Innovation System, and Developing Uzbekistan’s Industry Innovation Strategy. In 2012, Uzbekistan was again selected as the SDPC, with another three-year project conducted around the themes of Improving Innovation Strategy for Agriculture, Industrial Technology in Uzbekistan, and Supporting Uzbekistan's Development Strategy in Key Policy Areas: Industrial Cluster, Cyber Security, S&T, and Insurance.

014 • 2015/16 Knowledge Sharing Program with Uzbekistan The year 2015/16 is the final one for the second round of SDPC as well as the ninth year of conducting KSP with Uzbekistan. In consideration of the written demand survey which Uzbekistan has submitted and follow-up discussions from last year’s KSP, KDI confirmed a total of four topics for the policy consultation program for the 2015/16 KSP. The description below provides a brief overview of the 2015/16 KSP with Uzbekistan, including its topics, team of researchers and project progress.

Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Special Economic Zone, Industrial Development, Public Budgeting and Postgraduate Education Kang, Bong Kyun (Senior Advisor, Former Minister of MOFE) Topics Korean Experts Uzbek Experts

Improving Investment Climates and Export Lee, Si Wook Mutalib Hojimuratov Performance in the Navoi FIEZ (Korea Development Institute, PM) (MFERIT)

Development of a Strategy to Improve the Healthcare Budget Process and Budget Jo, Changik Saidjon Kodirov, Expenditure Effectiveness in the Republic of (Hallym University) Otabek R. Fazilkarimov (MOF) Uzbekistan

Korea’s Textile Industry Development Experience and Its Implications for Kim, Jong Il Sanjar Karimov, Developing a Textile Industry Strategy in (Dongguk University) Zulfia Asfandiyarova (IFMR) Uzbekistan

Choi, Seul Ki Improvement of the Postgraduate Education Doniyor Djunaydullaev (KDI School of Public Policy and System and Training of Research Personnel (IFMR) Management)

A Korean delegation headed by Mr. Lee, Siwook, Project Manager for 2015/16 KSP with Uzbekistan, visited Tashkent and Navoi, Uzbekistan from July 13 to 18, 2015 for a High-Level Demand Survey and Pilot Study to identify the relevant research themes and to gather data and information.

A Policy Seminar with a theme of ‘Energizing Navoi FIEZ’ was held in Seoul, Korea from December 7 to 11, 2015 where both KSP counterparts gave presentations to generate in-depth understanding of the KSP topics along with visiting associated organizations to seek ownership and inspiration of KSP. In addition, the Interim Reporting Seminar and Policy Practitioners’ Workshop was held from April 11 to 15, 2016 in Seoul, Korea. Eleven Uzbekistan delegates, headed by Azamat Fayziyev, visited Seoul and participated in the Interim Reporting and Policy Practitioners’ Workshop. At the Interim Reporting Workshop held on April 13, 2016 at the Plaza Hotel (Seoul), all the Korean researchers and Uzbek local consultants presented their interim research findings and entering into

2015/16 KSP with Uzbekistan • 015 discussion concerning them. Furthermore, Policy Practitioners’ Workshop provided policy practitioners with first-hand experiences by visiting relevant ministries and organizations including Incheon Main Customs, Incheon Free Economic zone, Korea Federation of Textile Industries, National Medical Center, Korea Development Institute (KDI), KDI School of Public Policy and Management, National Research Foundation of Korea, Seoul National University, Ministry of Strategy and Finance and Ministry of Education.

For the final stage, the Senior Policy Dialogue and Final Reporting Workshop was conducted in Tashkent, Uzbekistan from May 31 to June 4, 2016 to share the final research findings and policy recommendations with high-level policymakers, policy practitioners, and other Uzbekistan stakeholders at the Senior Policy Dialogue and Final Reporting Workshop. The workshop was held successfully at Institute of Forecasting and Macroeconomic Research (IFMR) Main Conference Hall, Tashkent, on June2, 2016, with approximately 80 government officials and experts. In addition, surveys and interviews will be conducted to obtain feedback on 2015/16 KSP.

016 • 2015/16 Knowledge Sharing Program with Uzbekistan Executive Summary

Siwook Lee (Korea Development Institute)

Even with the prolonged global recession, the Republic of Uzbekistan has shown a stable and high GDP growth over the last couple of years, especially thanks to a large fiscal stimulus. The government of Uzbekistan plans to implement around 850 new projects with a total investment of more than $40 billion in order to achieve structural reforms, modernization and diversification of production by the end of 2019. Recent favorable macroeconomic performances clearly suggest that Uzbekistan’s economy has been successful in overcoming the challenge of transition from the old Soviet system and transforming its economy towards a more market- oriented approach. At the same time, in order to realize its ambitious goal of becoming an industrialized, upper middle-income country by 2030, the Republic of Uzbekistan still needs to further upgrade its economic structure and systems.

Under these circumstances, the 2015/16 KSP with Uzbekistan, entitled “Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Free Economic Zones, Health Sector, Textile Industry and Post-graduate Education System”, addresses the following policy issues: 1) Improving Investment Climates and Export Performance in the Navoi FIEZ, 2) Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure Effectiveness in the Republic of Uzbekistan, 3) Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile Industry Strategy in Uzbekistan, and 4) IImprovement of the Postgraduate Education System and Training of Research Personnel. Research findings and major policy recommendations for each topic could be summarized as follows:

Executive Summary•017 1. Improving Investment Climates and Export Performance in the Navoi FIEZ

Recently, the government of Uzbekistan has regarded FDI attraction as one of its core policy priorities in achieving industrial development. One pivotal policy move in this direction is the establishment of the Navoi Free Industrial and Economic Zone (the Navoi FIEZ hereafter) in 2008. Since its establishment, FDI inflows have been gradually increased, but it is fair to say that the current investment and production levels are still far below its potential, considering the various advantages that it offers as an industrial site.

In this context, this chapter carefully re-evaluates the current status of the Navoi FIEZ and provides policy suggestions to invigorate production activities within the zone. Special attention is given to the improvement of investment climates and export activities in the Navoi FIEZ. Our evaluations and policy recommendations are primarily based on in-depth interviews and a comprehensive survey for companies currently operating in the Navoi FIEZ.

The Navoi FIEZ generally welcomes investment projects that are in line with its import-substitution and export-oriented industrialization policy; however, in reality, most of the existing companies produce goods destined for the domestic market. Consequently, exports activities within the zone are very weak at this moment in time.

In order to improve FDI inflows and export performance for the Navoi FIEZ, this chapter emphasizes the following policy reforms: First, the production concept of the Navoi FIEZ should be reconsidered, with greater emphasis placed on attracting export-oriented FDI firms, especially leading MNEs that produce goods suitable for air transportation. Second, the difficulties in foreign exchange often impede or even freeze up sizable production activities within the Navoi FIEZ. Special treatment for the Navoi FIEZ would definitely contribute greatly towards further FDI attraction.

Third, the current value-added tax system can be considered another policy area to re-consider. Resident firms in the zone are all small businesses or micro-firms, and it is highly plausible that they are hesitant in expanding their investments - and thus employment beyond 100 employees - due to the potential VAT burden. This chapter also discusses the importance of enhancing investment promotion activities and improving the legal framework for export promotion in Uzbekistan.

018•2015/16 Knowledge Sharing Program with Uzbekistan 2. Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure Ettectiveness the Republic of Uzbekistan

Since the mid-1990s, the Republic of Uzbekistan has implemented a series of healthcare reforms, focusing on the reconstruction of primary care and the establishment of an emergency care network. While the government of Uzbekistan has been attempting to expand the coverage of, and accessibility to, healthcare services, it has been facing highly costly healthcare expenditures that amount to over 16% of the national budget. Consequently, an effort to design strategic plans regarding the improvement of the budget process and effectiveness of budget expenditures in the healthcare field is highly desirable.

Most of the advanced countries have been updating their budget process systems on the basis of the methods through the state-of-the art evaluation schemes on the performances of the corresponding government or public projects. In this vein, the objective of this chapter aims at, after reviewing the successful experience of the Republic of Korea, developing effective strategy measures to improve the budget process and eventually increase the efficiency of budget expenditures in healthcare for the Republic of Uzbekistan.

Since its independence from the Soviet Union in 1991, the government of Uzbekistan has been struggling to remodel the pre-existing healthcare system characterized as a “high-cost, Semashko” system. The Soviet Semashko healthcare system largely neglected primary healthcare even though it provided all its citizens with access to ‘free’ health services. The two main weaknesses of the system were that it placed substantial emphasis on quantitative indicators rather than health outcomes or quality of healthcare, along with healthcare financing being biased to secondary healthcare.

The first healthcare initiative or reform (1998~2005), a.k.a. ‘Health 1’, focused on strengthening and improving the accessibility to primary healthcare services by providing over 3,200 health centers, along with the training of general practitioners (GPs) and nurses. Later, the second healthcare reform (Health 2) was initiated to reinforce and focus on the primary care system by providing equipment and capacity building. Finally, the third wave of healthcare reform, (Health 3) is currently being implemented to strengthen secondary and tertiary care by adopting a new budget process and management method on general and specialist healthcare separately. However, despite the groundbreaking series of healthcare reforms and the successful outcomes, the healthcare system in Uzbekistan has been quite costly and relatively inefficient.

Executive Summary•019 In this context, this project is conducted to design and provide the feasible policy solutions that are expected to resolve the abovementioned issues. The chapter consists of four sections. Section 2 discusses the budget process Korea adopts, Section 3 deals with an in-depth analysis of the cases in Uzbekistan, while Section 4 suggests new policies to improve the budget process and effectiveness in the healthcare field.

3. Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile Industry Strategy in Uzbekistan

The Republic of Uzbekistan is currently the sixth largest global cotton producer and fifth largest cotton supplier for world markets. Consequently, it has the potential to extend the value chain of the textile industry by taking advantage of its abundant cotton. To develop its textile industry, Uzbekistan should extend the local value-chain of the cotton textile industry based on its rich cotton production. Compared with the Korean experience, which started from the downstream and shifted toward upper-stream industries, the direction of textile industry development pursued in Uzbekistan is from the upstream to the downstream, which is in direct contrast to Korea’s experience.

The remainder of this chapter consists of five sections; Section 2 briefly introduces the characteristics of the textile industry from the perspective of critical factors for development. In section 3, we provide an overview of the current situation of textile industry in Uzbekistan and analyze the SWOT of the Uzbek textile industry. In section 4, we provide an overview of the experience of textile industry development in Korea. This documents the role of the textile industry in Korea’s economic development and also important policies implemented by the government of Korea. Finally, in Section 5, we outline the success factors for Korea’s textile industry development and explore what the Korean experience implies for Uzbekistan.

Although the context faced by Uzbekistan for textile industry development is different from that of Korea, the Korean experience provides a number of policy lessons for Uzbekistan. The success factor of Korea’s textile industry lies in its continuous extension of the local value chain, following the market signal from export markets. In this respect, the policy for promoting the textile industry should be focused on providing a favorable business environment for local textile firms in Uzbekistan, including foreign-invested firms, along with jointly discovering business opportunities along the value chain of the textile industry.

020•2015/16 Knowledge Sharing Program with Uzbekistan From the experience of Korea, we may list what the Uzbekistan government should do as follows: First of all, more active invitation of foreign direct investment is required to increase the local processing of cotton fiber. Towards this, the government should provide a more favorable environment for conducting business in Uzbekistan, notably including the reform in foreign exchange policy.

In addition, the government should remove anti-local production bias to extend the local value chain. A more market-oriented cotton distribution system should be gradually introduced. Along with removing bias against local production, more policy attention should be paid to the exports of middle and downstream textile industries. It is critical to hear the autonomous bottom-up demand-driven voice channels from business fields. Specifically, the establishment of an organization which is separated from the government’s bureaucratic system and assigned a special task on export-promotion with a close relationship with business sector is needed. Finally, the development of timely, accurate, and comprehensible data on the textile industry in Uzbekistan is imperative. Without acquiring accurate information on the situation of the industry, it is impossible to devise effective policies.

4. Improvement of the Postgraduate Education System and Training of Research Personnel

The Education system in the Republic of Uzbekistan has faced significant changes since independence. Substantial development of the education sector commenced in 1997 with the adoption of the Education Act and the National Program for Personnel Training (NPPT), which establishes a long-term strategy for strengthening education, developing a continuing education system and reinforcing the multi-level higher education system.

Nowadays, the training of highly qualified specialists who have doctorate degrees in both universities and research institutions is one of the important directions of the higher education sector’s development in Uzbekistan. In order to improve the quality of doctoral education the existing two-stage postgraduate education, “Candidate of Sciences” and “Doctor of Sciences,” has been replaced by a single level, “Doctor of Sciences”, in 2012.

The experience so far indicates that the doctoral educational process is not efficient enough and, in fact, a doctoral student comprehends the theoretical part and acquires research skills on their own without requiring the assistance and supervision of the scientific adviser. In this regard, we believe there is a need to find ways to improve the efficiency of scientific personnel training based on the

Executive Summary•021 experience of the Republic of Korea and other developed countries.

First of all, educational infrastructure generally comprises administrative support, financial support and governance to monitor the entire process. A characteristic from the Korean case is that the three elements are managed by the departments themselves. Although laws are enacted to regulate the big picture, detailed regulations for student selection, curriculum and faculty evaluation are established autonomously by each department. In this regard, it is strongly recommended that doctoral degree programs in Uzbekistan should be reorganized by departments as the key unit.

In addition, it should be admitted that it is difficult to finish a doctoral study which has a strong curriculum and rigorous dissertation writing process within three years. To ensure the quality and quantity of doctoral study in Uzbekistan, it should be considered to reschedule the doctoral study into four to five years and allow extra time when appropriate. Finally, the introduction of independent quality assurance systems in education is highly recommended. Specifically, the establishment of independent quality assurance systems in education will facilitate the accomplishment of strategic objectives and the monitoring of indicators of the education system in accordance with international standards. Independent quality assurance systems in education will verify institutions from pre-school to the universities on the principles of transparency and objectivity.

022•2015/16 Knowledge Sharing Program with Uzbekistan 2015/16 Knowledge Sharing Program with Uzbekistan: Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Special Economic Zone, Industrial Development, Chapter 1 Public Budgeting and Postgraduate Education

Improving Investment Climates and Export Performance in the Navoi FIEZ

1. Introduction 2. Current Status of the Navoi FIEZ 3. Survey Analysis Targeting Resident Companies in the Navoi FIEZ 4. Policy Evaluations and Recommendations ■ Chapter 01

Improving Investment Climates and Export Performance in the Navoi FIEZ

Siwook Lee (Korea Development Institute) Mutalib Hojimuratov (Ministry of Foreign Economic Relations, Investments and Trade)

Summary

Recently, the government of Uzbekistan has regarded FDI attraction as one of its core policy priorities in achieving industrial development. One pivotal policy move in this direction is the establishment of the Navoi Free Industrial and Economic Zone (the Navoi FIEZ hereafter) in 2008. Since its establishment, FDI inflows have gradually been increased, but it is fair to say that the current investment and production levels are still far below their potential, considering the various advantages that the zone offers as an industrial site.

In this context, this chapter meticulously re-evaluates the current status of the Navoi FIEZ and provides policy suggestions to invigorate production activities within the zone. In this, special attention is given to the improvement of investment climates and export activities in the Navoi FIEZ. Our evaluations and policy recommendations are primarily based on in-depth interviews and a comprehensive survey of companies currently operating in the Navoi FIEZ.

To date, 24 investment projects, with a total cost of 130.9 million USD, have been implemented in the Navoi FIEZ. From these, foreign investors have been involved in 17 projects with the value of 35.4 million USD of FDI. The zone has been established for seven years, but the occupancy rate remains at 17.4%. A majority of incumbent firms are domestic-foreign joint ventures, and domestic investors are predominately public enterprises.

024 • 2015/16 Knowledge Sharing Program with Uzbekistan The Navoi FIEZ generally welcomes investment projects that are in line with its import-substitution and export-oriented industrialization policy, but in reality, most of the existing companies produce goods destined for the domestic market. Consequently, export activities within the zone are very weak at present. In addition, the actual usage of air transport logistics, which is one of the most important advantages the zone offers, has been quite limited.

In order to improve FDI inflows and export performance for the Navoi FIEZ, this chapter emphasizes the following policy reforms: First, the production concept of the Navoi FIEZ should be re-considered, with more emphasis placed on attracting export-oriented FDI firms, especially leading MNEs that produce goods suitable for air transportation. Second, the difficulty in foreign exchange often impedes or even freezes up sizable production activities within the Navoi FIEZ. Special treatment for the Navoi FIEZ would definitely contribute greatly towards further FDI attraction.

Third, the current value-added tax system appears to be another area of policy worth reconsidering. Resident firms in the zone are all small businesses or micro firms, and it is highly plausible that they are hesitant to expand their investments - and thus employment beyond 100 employees - due to the potential VAT burden. This chapter also discusses the importance of enhancing investment promotion activities and improving the legal framework for export promotion in Uzbekistan.

1. Introduction

The prolonged global recession since 2008 has forced countries to take urgent measures to overcome the consequences of the global crisis, and has intensified competition among them towards improving each country’s economic position in the world market. Under this circumstance, many economies have adopted a more aggressive policy stance to attract foreign direct investment (FDI hereafter). In principle, FDI not only offers financial resources for additional investment opportunities, but also brings new technology and managerial skills. Furthermore, FDI often spurs competition in the domestic market, which contributes to enhance market efficiency and overall productivity.

Since the 2000s, the government of Uzbekistan has regarded attracting FDI as one of its core policy priorities in achieving industrial modernization and technological upgrading. It has made various efforts to improve its investment climates and to introduce favorable incentive systems for foreign investors. In recent years there have been more than 50 legislative documents issued to accelerate foreign investment processes. Continuous efforts for such FDI policy reform led to

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 025 an increase in the annual size of FDI, from 75 million USD in 2000 to 2.87 billion in 2015.1)

[Figure 1-1] FDI Trend in Uzbekistan

(Unit: million USD) 3500

FDI Foreign Loans

3000

2500

2000

1500

1000

500

0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Database of the Ministry of Foreign Economic Relations, Investments and Trade.

One of the symbolic policy moves for FDI attraction in Uzbekistan has been the establishment of free economic zones. The government of Uzbekistan enacted "the law on free economic zones" in 1996, and established its first free industrial and economic zone (FIEZ hereafter) on the territory of Navoi region in 2009, in accordance with the presidential decree No. UP-4059 in 2008. Businesses operating within the Navoi FIEZ are guaranteed preferential treatment on customs procedures, currency circulation and taxation, as well as a simplified procedure regarding the visa process and hiring of foreign workers within the territory of Source: Kim et al., 2011; Funke et al., 2013. the FIEZ. In addition to the Navoi FIEZ, the government of Uzbekistan created two additional Special Industrial Zones (SIZs hereafter): the Angren SIZ in the Tashkent region in 2012 and the Djizak SIZ in 2013.

The main objective for the Navoi FIEZ is to stimulate modern high-technology production, which is competitive on the international market, through the introduction of modern foreign equipment and machinery, production modules, and innovative technologies. Therefore, priority has been given to high value- added industrial sectors including electro-technical goods and telecommunications

1) According to data of the Ministry of Foreign Economic Relations, Investments and Trade, FDI inflows have continuously increased, reaching at 2.9 billion USD in 2015.

026 • 2015/16 Knowledge Sharing Program with Uzbekistan equipment, precision machinery, component parts for automobile parts/ components, pharmaceutical products, food processing, and plastic and polymer articles.

So far, 24 investment projects, with a total cost of 130.9 million USD, have been implemented in the Navoi FIEZ. Of these, foreign investors have been involved in 17 projects with 35.4 million USD worth of FDI. These investment performances could be regarded as a considerable achievement, taking into account that the global recession has triggered a slowdown in FDI flows worldwide. However, at the same time, it is fair to say that the current investment and production levels are far below the potential of the Navoi FIEZ, considering the numerous advantages that it contains an industrial site, such as multimodal transport logistics, easy access to neighboring Central Asian countries, high-quality local human resources and favorable incentive schemes given for foreign investors.

In this context, this chapter aims to re-evaluate the current status of the Navoi FIEZ and provide some policy suggestions to invigorate FDI inflows and production activities within the zone. Special attention is given to the improvement of investment climates and export activities in the Navoi FIEZ. In particular, our evaluations and policy recommendations are primarily based on in-depth interviews and a comprehensive survey for companies currently operating in the Navoi FIEZ.

This research project is pursued as part of 2015/16 Knowledge Sharing Program (KSP hereafter) between Uzbekistan and Korea. The first KSP between two countries began in 2004, under the topic of “Industrial Development and Export Promotion Policy of Uzbekistan.“ In that project, the establishment of Special Economic Zones (SEZs hereafter) was recommended as an effective means for industrial upgrading and the sustainable development of the Uzbekistan economy. As a follow-up project, a feasibility study on establishing SEZs in Uzbekistan was conducted by Korean experts in 2007. Finally, when the Navoi FIEZ was established in 2009, extensive joint research between two countries was carried out under the 2009/10 KSP. The direction of production for the Navoi FIEZ was carefully investigated, and investment promotion strategies as well as the operation systems for the Navoi FIEZ were proposed, based, in particular, upon Korean experiences on SEZs. This year's KSP is therefore a follow-up study aiming to provide interim evaluations and policy suggestions on the Navoi FIEZ.

The rest of the chapter proceeds as follows:2) In Section 2, the current status of

2) While KSP reports usually devote an independent section for introducing Korean experiences on the policy issues in focus, we omit this part because they were presented in detail at the 2009/10 KSP final reports. Instead, we add a section presenting out survey results on resident firms within the Navoi FIEZ.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 027 the Navoi FIEZ is described in detail. This section starts by introducing a brief history and background of the Navoi FIEZ, presenting a legal/institutional framework and incentive systems for foreign investors, and then discussing investment and export performances for the Navoi FIEZ. Section 3 contains the survey results, targeting resident companies in the Navoi FIEZ. Finally, Section 4 provides overall evaluation outcomes and key policy suggestions to improve investment climates for the Navoi FIEZ.

2. Current Status of the Navoi FIEZ

2.1. The Navoi FIEZ: Overview

Uzbekistan gained its independence from the former Soviet Union in August 1991, and has gradually paved the way towards its transition to a market economy. Between the periods of 1996 and 2002, the economy of Uzbekistan reached growth by 4-5% per year and between 2003 and 2008 its economic growth rate accelerated to 7-8% per year, prior to the establishment of the Navoi FIEZ.

In the mid-2000s, many countries made tremendous economic strides in the world market, and being competitive is a very important priority for both developing and advanced economies. In order to remain strong in the competitive world market, a firm industrial base where relatively high-quality and low-price goods are produced through attraction of foreign direct investments and high technology to the economy is needed. Uzbekistan, due to its natural competitive advantages, has successfully increased its industrial potential and provided the whole region with numerous industrial goods. It thus has all the necessary prerequisites for increasing its potential as the regional industrial center.

In this regard, at the end of 2008, in order to create qualitatively new investment climates for the further attraction of foreign direct investments, the authority of the country had decided to establish its first free economic zone, namely the Free Industrial Economic Zone “Navoi” in the Navoi region. To fully disclose all capabilities, advantages and potentials of the Navoi FIEZ, it was aimed to explore them through the prism of goals and tasks - objective prerequisites which underlie its creation. The establishment of the Navoi FIEZ has been regarded by the Government as one of the most important steps toward the improvement of the investment environment of the country.

028 • 2015/16 Knowledge Sharing Program with Uzbekistan For any foreign investor political and macroeconomic stability, favorable natural and climate conditions, along with a hospitable and hard-working population are very important issues for conducting business in the country. There are many factors favoring the successful implementation of business projects in Uzbekistan.

• Access to the wide range of raw materials and opportunities for their deep processing into higher value-added products: There are unique sources of solid natural resources in Uzbekistan, notably metallic, but also non-metallic ones. The agricultural sector is also an important supplier of raw materials to industrial enterprises. • Proximity to the wider markets: Almost every foreign company, which has chosen Uzbekistan as its production base, notes the special location of the republic in the center of the five biggest and most dynamically growing markets – CIS countries, Central and Eastern Europe, Southern and South-East Asia, and the Middle East. • Developed transport infrastructure: An extensive network of transport communications passes through Uzbekistan, which represents a key element in the system of Eurasian corridors. There are is international highway «E-40», which is the shortest connection between Europe and East Asia, and a railroad with access to the markets of Central Asia, CIS, South-East Asia, Europe, Middle East and the Persian Gulf countries, located in immediate proximity to the FIEZ. • A population literacy level of 100%, significant personnel and intellectual potential, the education system meeting modern international standards. • Opportunity to start from greenfield creation of an environmentally friendly, modern, well-diversified industrial base by the attraction of technologies of the future and new resource-saving and energy-efficient equipment, which will remain acute during next 20-30 years.

Taking into consideration existing competitive advantages of the Navoi region, the concept of establishment of Navoi FIEZ adopted in 2008, based on the principle of synergy of the following four blocks: ① transport and logistics block, ② Industrial block, ③ innovation block, and ④ tourist, culture and recreational block. The Navoi FIEZ has been planned to be implemented in three different stages with the gradual development of up to 500 ha of land at each stage.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 029 [Figure 1-2] Floor Plan of the Navoi FIEZ

For the maximum effective exploitation of the advantages of the multimodal transport and logistics hub of Navoi, it was decided to create the Free Industrial Economic Zone on the area of 564 ha next to the international airport, highway and railway. Such factors as proximity to energy, water and gas supply units, inhabited locations, and sources of labor, as well as the favorable ecosystem necessary for the creation of an attractive working and living environment for residents of Navoi FIEZ, have been taken into account while choosing the location of the zone.

The Navoi FIEZ is located on the bank of Zarafshan River close to Malikrabat town, 10 km from Navoi city, 800 m from the nearest electricity substation, 300 m from a water distributing station and 400 m from a gas distributing station. The distance from FIEZ to «E-40» highway is 2 km, and to the cargo terminal of the airport is 4 km.

To create an optimal logistics system according to the principle «from producer to consumer», the construction of four-lane roads from the international highway «E-40», as well as a branch from a railway siding, was finalized in 2010. It has also been operating a railway cargo terminal with a container platform with a total area of 40 ha. Automobile roads with a total length of 26 km with step-by-step access to enterprises are under construction inside the FIEZ territory. It allows the provision of construction sites with equipment and building materials, as well as workshops with raw materials and technologies. Car parking and TIR-parking for heavy-load trucks are located at the entrance to the territory of the FIEZ by the

030 • 2015/16 Knowledge Sharing Program with Uzbekistan cargo terminal on both sides of the automobile road on the territory of five ha each.

In addition, at the entrance to the FIEZ administrative-financial zone is allocated two land plots of a total area of 14 ha for customs clearance of goods, processing of certificates of conformity and country of origin of goods, banking, financial services and other related and administrative services. Service facilities, including fire stations , public utilities, special auto bases, etc. are allotted. Finally, industrial enterprises on FIEZ territory are allotted with 360 ha of land with the possibility of establishing enterprises of the area from 3 to 25 ha.

2.2. Advantages of the Navoi Region as a FIEZ Location

Experts in Uzbekistan note that the Navoi FIEZ has great significant prospects due to its location on the crossroads of trade routes between the huge regional markets of South-East Asia, Central and Eastern Europe, Middle East and CIS, which played a considerable role for in the Government in making this decision. Therefore, various estimates argue suggest that more than 40 of the most dynamically growing cities of those regions are located around 2,000 km away from the Navoi FIEZ.

MFERIT/UNDP (2013) points outhighlights that the factor of strategic location of Navoi Province on the crossroads of trade routes between the huge regional markets of South-East Asia, Central and Eastern Europe, Middle East and CIS has played a considerable role in making this decision. As a result of this observation, the paper point outnotes that the Government decision of the FIEZ’s location in Navoi region was based on numerous factors:

Firstly, as one of the most industrially developed regions of Uzbekistan, Navoi province, with a strategic location in the central part of the country, has huge industrial and manufacturing complexes, skilled labor forces and rich raw material resources. Moreover, the Navoi FIEZ has was established close to the Administrative center Center of the province – Navoi city, which is the youngest city and has the large industrial capacity of the western part of Uzbekistan.

Second, the Navoi FIEZ is located close to the multimodal transport logistics hub based on the “Navoi” international airport, international highway E-40 and railways. Developed Its developed multimodal network system is regarded as a competitive advantage that allows significantly allows enterprises-residents of the Navoi FIEZ to save the time and costs of delivery goods by air from Uzbekistan and transit through territory of the country. Location Its location on

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 031 the crossroads of international air and land transport corridors “North-South” and “East-West”, transportation logistics represents an ideal regional center for international freight flows management.

Advantages of multimodal transport-and-logistics hub "Navoi" are listed below.

• Air transportation

Placed in the center of the country and on the crossroads of North-South and East-West international land and air transport corridors North-South and East- West, the Navoi airport represents an ideal regional center for the management of international freight flows management. Based on agreement with the Korean Air Company, the first phase of modernization of “Navoi” airport has been accomplished, including the creation of an international intermodal logistics center and the construction of a cargo terminal with capacity of cargo handlinga cargo handling capacity of 300 tons in 24 hours.

In the future, with the increase of freight flows, it is planned to increase capacities of for the terminal by up to 1000 tons per day. Logistic The logistics center functions as a fully-fledged system for the land distribution of cargo arriving through the Navoi airport from all over the region and for the redistribution of air freightairfreight flows to directions the North-South and West-East directions. The use of air corridors with landing in Navoi offers a substantial saving in time and transportation costs for goodscost of goods transportation. The distance from South-East Asia to Europe through Navoi is shorter than that through Dubai by 1 1,000 km, and time savingthe time saved during the flight is 1.5 hoursours, and with a fuel saving is of 15 tons for each aircraft.

• Automobile transportation

The Navoi FIEZ is connected and located in immediate proximity to the international highway E-40, which is the shortest connection between Europe and China. Automobile cargo transportation ion the direction China-Europe through Uzbekistan is shorter by about around 1000 km in comparison with the route through the China-Russian border. This reduces transportation costs by USD 800 USD per vehicle.

• Railroad transportation

Navoi FIEZ is connected and located in immediate proximity to the railroad, with access to the markets of Central Asia, CIS, South-East Asia, Europe, Middle

032 • 2015/16 Knowledge Sharing Program with Uzbekistan East and the Persian Gulf countries. It takes 7 seven days for a container train to get from Tashkent to Bandar-Abbas sea portseaport, 10 and ten days from Tashkent through Teheran to Istanbul. This is twice as fast as transportation conducted bypassthat bypasses Uzbekistan.

There are main railway routes passing through the Navoi region with an access on to the South to the ports of Iran and Turkey, and on the West and North to the ports of Black Sea and Baltic Sea. The shortest railroad route from China to Europe also travels through Navoi. The shortest transit connection to Afghanistan, Pakistan and India appeared after the “Guzar-Baysun-Kumkurgan” railroad hads been put into operation.

2.3. Framework and Incentive Systems of the Navoi FIEZ

2.3.1. Current Policy Objective of the Navoi FIEZ

For operational management and performance of the functions of state regulation of the zone, the Administrative Council of the Navoi FIEZ was established and the functions of working body entrusted to MFERIT. Meetings of the Administrative Council are held as required, but at least once a quarter, to consider the issues of coordination and regulation of the Navoi FIEZ.

The Working Body (MFERIT) has, on a regular basis, been working with the relevant representatives of government bodies in order to respond to emerging issues concerning the activities of Navoi FIEZ. The meetings are held at least once a month, including visits to FIEZ. In order to improve the investment climate of Navoi FIEZ, MFERIT continually conducts surveys among participants of the zone and foreign companies.

Moreover, the Uzbek Government always considers the issue of granting the Directorate broader powers and increasing its responsibility, including assigning a function to search for potential investors and negotiate directly with foreign partners, to independently solve problems of FIEZ enterprises with the involvement of relevant government bodies, to define annual priority areas on the basis of in-depth analysis of the economic situation in the world and market research and other areas of priority.

In addition, the appropriately appointed highly qualified executives of the Directorate are regularly required to share their solid practical experience in the field of foreign trade activities with others, in the organization of courses and seminars abroad for staff of the Directorate that are providing personnel training.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 033 At the same time, research on the experience of foreign countries are regularly conducted in the development of free economic zones activity. It is also planned to establish contacts with the administrative authorities of foreign SEZ for the further exchange of experience and information, in order to study their positive experiences.

Moreover, information on investment opportunities and the conditions created in the territory of Navoi FIEZ has been provided within almost all major events held in Uzbekistan and abroad, including international business forums, conferences, briefings, etc. Diplomatic missions of Uzbekistan abroad, the Agency “Uzinfoinvest”, chamber of Commerce and industry of the Republic of Uzbekistan are also involved in these issues.

2.3.2. Legal Framework of the Navoi FIEZ

In fact, the initial moves of establishing SEZs in Uzbekistan commenced earlier, namely in 1996, when the basic legislative Act for SEZs was founded with the adoption of the Law of the Republic of Uzbekistan “On free economic zones”. However, according to the analytical report of the UNDP of Uzbekistan (2008), since the Act repeatedly adopted initial attempts at establishing SEZs, it has failed in territories of the country such as the free economic zone in Jizzakh province (1996), the special open economic zone of international tourism in Samarkand province (1997), and “Nukus”, the free industrial-economic zone in Karakalpakstan (1998).

Based on the economic situation of that time, the paper identifies that the initial failures were primarily related to the inadequate design of the Law, that did not meet the modern requirements of the establishment, operation and administration of the SEZs. Second, following the totalitarian Soviet regime, effective market economy mechanism had not yet been formed in Uzbekistan at that time. Third, the poor infrastructure, transport and logistics system inside the country caused difficulties for industrial production and transportation, all of which had a negative impact on the investment attractiveness of the country.

After 12 years of adoption of the Law, the Government decided to officially establish the first Uzbek SEZ – named the “Navoi” Free Industrial Economic Zone - in accordance with presidential decree in late 2008, while the global financial- economic crisis was continuing. Ogai (2009) argues that precisely the presidential decree on the establishment of FIEZ “Navoi” caused the consolidation of the legal basis for creating and running SEZs in Uzbekistan and introducing changes and amendments to the Law “On free economic zones” in 2009, which will ensure further development of their industrial potential. The chronology of the adoption

034 • 2015/16 Knowledge Sharing Program with Uzbekistan of legislative acts on establishment, administration, and organization of activities of SEZs is summarized in

Chronology of Legislative Acts on SEZs of Uzbekistan

Date & Name of Act Type of Act Number Laws of the Republic of Uzbekistan April 25, Law of the Republic of Uzbekistan “On free Main legal basis for the establishment and 1996 economic zones” functioning of free (special) economic zones in #220-I Uzbekistan August, Law of the Republic of Uzbekistan “On Adoption of amendments and supplements to 2009 Amendments and Supplements to the Law of the Law of the Republic of Uzbekistan “On free the Republic of Uzbekistan “On free economic economic zones”. zones”. Decree of the President and Resolution of Cabinet of Ministers of Republic of Uzbekistan December 12, Decree of the President of Republic of Uzbekistan Establishment of Navoi Free Industrial Economic 2008 “On establishment of Free Industrial-Economic Zone in Navoi region #UP-4059 Zone in Navoi region” January 27, Resolution of Cabinet of Ministers of Republic Approved: 2009 of Uzbekistan “On measures of organization of – Regulation on Navoi FIEZ; #21 activity of Navoi Free Industrial Economic Zone” – Membership of Administrative Board of Navoi FIEZ February 19, Resolution of Cabinet of Ministers of Republic Approved Charter of State unitary enterprise 2009 of Uzbekistan “On approval of Charter of State ”Directorate of Navoi FIEZ” #48 unitary enterprise ”Directorate of Navoi FIEZ” April 9, Resolution of Cabinet of Ministers of Republic Approved Regulations on simplified regime of 2009 of Uzbekistan “On approval of Regulations on entry, departure stay and hiring of foreign citizens #104 simplified regime of entry, departure stay and and stateless persons on the territory of Navoi FIEZ hiring of foreign citizens and stateless persons on the territory of Navoi FIEZ” April 9, Resolution of Cabinet of Ministers of Republic of Approved: 2009 Uzbekistan "On measures to regulate activity of – Regulations on Administrative board of Navoi #105 Navoi Free Industrial-Economic Zone" Free Industrial Economic Zone; – Regulations on a procedure for selection of investors to locate in Navoi Free Industrial Economic Zone; – Regulations on a procedure for registration of economic establishments as participants of economic activity of Navoi Free Industrial Economic Zone and carrying out entrepreneurial activity by them April 23, 2009 Resolution of Cabinet of Ministers of Republic Approved: #120 of Uzbekistan “On approval of Regulations on a – Regulations on a procedure for securing a special customs special tax regime on the territory of Navoi Free regime and a procedure for ensuring a special tax Industrial Economic Zone; regime in the territory of Navoi Free Industrial- – Regulations on a special customs regime on the Economic Zone” territory of Navoi Free Industrial Economic Zone December 25, Resolution of Cabinet of Ministers of Republic of Approved Regulation on the procedure of 2013 Uzbekistan “On approval of the regulations on functioning of special currency regime in Navoi #341 the procedure of functioning of special currency FIEZ regime in Navoi FIEZ”

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 035 According to Article 3 of the Law in its new edition, a Free Economic Zone (FEZ hereafter) can be established in accordance with a Decree of the President of Uzbekistan. The status and operating period of a FEZ will be stipulated by resolution on its establishment. The cabinet of Ministers of Uzbekistan will determine the borders of the economic zone based on Presidential Decree on its establishment. The operating period of FEZ can be extended only by a decision of the President of Uzbekistan at least three years before the expiry date.

Moreover, since 2009, the Government of the Republic of Uzbekistan has adopted a number of legislative Acts providing for the improvement of the investment climate, simplifying business administration and providing additional benefits and preferences for foreign investors, including carrying out activities on the territory of FIEZ "Navoi".

2.3.2.1. FDI PROMOTION MEASURES

Decree of President of Uzbekistan “On additional measures to stimulate attracting foreign direct investments” #UP4434 dated April 10, 2012.

According to this Degree, newly established enterprises with an investment volume of at least 5 million USD reserve the right to pay those taxes that operated at the date of their registration for ten years.

Companies attracting FDI are exempt from payment of corporate income tax, property tax, social infrastructure development tax, unified tax for small business, mandatory payments to the republican road fund and to the reconstruction fund for a period from three to seven years depending on FDI volume.

Moreover, the extension of incentives and privileges to enterprises with foreign investment allocated are offered in all regions of Uzbekistan (except Tashkent region and Tashkent city) and simplification of conditions for usage of tax exemptions.

The President’s Decree #UP-4434 also simplified conditions for the usage of these tax exemptions. For example, if previously a share of foreign participants in an authorized capital of the enterprises should have been not less than 50%, under the new Decree this percentage was lowered to 33%.

Moreover, the list of branches of economy to which privileges are granted to direct private foreign investment apply, has been extended from 8 to 20 branches (including the chemical industry, the coal industry, machinery, the glass and chinaware industry, the production of toys, and others).

036 • 2015/16 Knowledge Sharing Program with Uzbekistan 2.3.2.2. REDUCTION OF BUREAUCRACY

Decree of President of Uzbekistan “On measures to drastically reduce the statistical, fiscal, financial reporting, licensable activities and licensing procedures” #UP-4453 dated July 16, 2012

According to the Degree, key improvements were made in the following;

• Reduced national statistical, financial, tax and other reporting by their elimination and consolidation of duplicate forms, as well as the frequency of submission of applications - abolished 80 licensing procedures (26% of the total) and 15 licensed activities (20% of total); • Abolished tax reporting for all types of taxes and other obligatory payments on a monthly basis are canceled, except for the excess profits tax; • Micro firms submit statistical reports on an annual basis with quarterly conducting sample surveys by statistical agencies in the respective directions and spheres of activity.

Decree of President of Uzbekistan “On measures to further improvement of procedures related to business activities and provision of public services” #PP-2164 dated April 15, 2014

According to the Degree, key improvement was made in the following:

• From June 1, 2014, abolishment of individual types of licensed activities and documents of allowing character; • Reduced the terms and fees at registration of licensed activities and licensing procedures; • Introduced the unique Single Portal system for interactive public services for businesses and entrepreneurship.

2.3.2.3. IMPROVEMENT OF INVESTMENT CLIMATE

Decree of President of Uzbekistan “On measures for further cardinal improvement of business environment and providing greater freedom to entrepreneurship” #UP-4455 dated July 18, 2012.

• Approved the comprehensive program to improve legislation and implementation of measures for further improving business environment and providing greater freedom to entrepreneurship; • Adopted rules aimed at further improving conditions for entrepreneurial activities, entered into force on August 1, 2012.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 037 • From January 1, 2013, entrepreneurship had opportunities to use some public services in electronic form.

Decree of President of Uzbekistan “On additional measures on further improving investment climate and business environment in the Republic of Uzbekistan” #UP-4609 dated April 7, 2014.

• Approved the program of additional measures for further improving the investment climate and business environment, along with the improved efficiency of stimulating development for entrepreneurship activities for 2014-2015; • From 1 July 2014, increased the limit for the average annual number of employees of small businesses in selected labor-intensive industries (building materials, light and food industries); • Moreover, there were some amendments and changes in current national legislation, according to which mandatory sale of revenue in foreign currency is exempt for: a) A period of five years from the date of registration of enterprises with foreign-investments specializing in the production of consumer goods, whose share of foreign capital in the charter capital exceeds 50% and the proportion of own production is more than 60% of the revenue of economic activity; b) loans in foreign currency; c) foreign currency revenue, coming from the export of goods (works, services) produced by micro- and small enterprises, except for carrying out the export of certain goods.

At the same time, residents of Navoi FIEZ are supported on a regular basis to ensure the timely conversion of funds for the purchase of raw materials and components.

In order to create the most favorable conditions for the further attraction of FDI and further revitalization of the FIEZ, the corresponding draft of Presidential Decree “On additional measures to strengthen and extend the activities of free economic zones” was developed and submitted to the Government. According to the draft, the minimum investment threshold for the participants of Navoi FIEZ is reduced from 3 million euro to 300 thousand USD with a gradation period of given privileges, which depends on the volume of investment introduced from 3 to 15 years.

Moreover, the draft decree stipulates that if a subsequent legislation impairs the conditions of FIEZ participants’ activity, they have the right to apply, for ten

038 • 2015/16 Knowledge Sharing Program with Uzbekistan years, the rules and regulations of the tax, customs and currency legislation that were in force at the date of registration of the participant.

Thanks to implemented activities and reforms, Uzbekistan has improved its rankings in the Doing Business Report by the World Bank in the last two years, especially in the protection of investors, the creation of business-friendly environment, starting a business, getting credit, enforcing contracts, resolving insolvency and facilitating trade. The Government is maintaining its efforts to enhance Uzbekistan’s rankings in the Doing Business Report.

2.3.3. Incentive Systems of the Navoi FIEZ

A financial incentive is one of the most important principles of the Government policy on the creation of SEZs. Stefanovich (2008) also argues that the SEZs are crucial for an increase of FDI inflow, which provides business entities with financial incentives, an easy approval process for FDI, sufficient communication, transport and logistics infrastructure, minimal stage of bureaucratic procedures, convenient labor law and other softened requirements.

Significant investments by Uzbekistan in the development of FIEZ in Navoi also include the unprecedented privileges and preferences provided for residents of FIEZ. These are essentially tax-free and duty-free regimes, special customs and favorable currency regimes, along with simplified order of stay and recruitment processes.

Business enterprises registered in the Navoi FIEZ are exempt from paying land, property, profit taxes, social infrastructure development tax, unified tax payment (for small businesses), compulsory contributions to the Republican Road Fund and Republican School Fund depending on the volume of deposited foreign direct investments:

• from 3 to 10 million Euros - for 7 years; • from 10 to 30 million Euros - for 10 years. For the following five years rates for profit tax and unified tax payment are fixed at the level of 50% lower than current rates; • more than 30 million Euros - for 15 years. For the following ten years, rates for profit tax and unified tax payment are fixed at the level of 50% lower than current rates.

Resident enterprises of the Navoi FIEZ are exempt from paying customs duties for equipment, raw materials and components imported for the production of export-oriented goods for the full operation period of the zone. Customs duties

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 039 for raw materials and components, imported for production of goods to be sold in the domestic market of Uzbekistan, are levied at the rate of 50% of the rate in force with a delay of payment period for up to 180 days.

Within the Navoi FIEZ, mutual payments are allowed to be made in foreign currency, payments for supply of goods, works and services provided by business entities of the republic – in freely convertible currency. In this regard, the Navoi FIEZ enjoys one of the most favorable conditions in the world.

As important conditions for the effective running of enterprises and enhancing the attractiveness of the Navoi FIEZ the creation of wide system of privileges and preferences, along with the simplified order of passage of various procedures, have been enacted.

Currently, the tax, customs, foreign exchange regimes adopted in the territory of Navoi FEZ do not differ from the conditions created for enterprises outside the zone or territory and do not provide more preferential mode of operation.

2.3.4. Comparison of Incentive Systems with SIZs

In order to ascertain whether the Navoi FIEZ has a sufficiently differentiated incentive system within Uzbekistan, we compare the incentive system of Navoi with those of ① Angren SIZ, ② Djizak SIZ and, ③ Localization Programs. The results are presented in detail in

2.3.4.1. Tax Regime

Same benefits for the participants of the Angren and Jizzakh SIZ involve type of tax, minimum amount of investment and period tax exemption provided on practically the entire territory of the Republic (with the exception of Tashkent and Tashkent region) according to the Decree of the President of the Republic of Uzbekistan #UP-4434 dated 10.04.2012. In this case, the conditions of FIEZ “Navoi”, which includes the need to achieve a minimum investment of 3 million euro for tax benefits, is not attractive compared to the Angren and Jizzakh SIZ where the average is just 300 thousand USD.

In some cases, for example, the enterprises included in the localization Program (NoPP-2120 from 04.02.2014), as well as operating in selected industries, like the automotive and light industry (NoNoPP-800 dated 21.02.2008 and PP-1512 dated 28.03.2011) have more significant tax benefits compared with enterprises of the FIEZ Navoi.

040 • 2015/16 Knowledge Sharing Program with Uzbekistan

Comparison Table of Incentive Systems of the Navoi FIEZ, Angren SIZ, Djizak SIZ and Localization Programs 20% 0.2% Navoi FIEZ (& 50% profit tax reduction for 5 years) For goods aimed at exports; for the full existing term of FIEZ For goods aimed at domestic market: 50% (half) of the existing rates with delay of payment period up to 180days (& 50% profit tax reduction for 10 years) Equipment / Raw materials Materials Components (not produced in Uzbekistan) under the condition of contributed investment amount: · 7 years: from 3 ~ 10 mln. EURO · 10 years: over 10~30 mln. EURO · 15 years: over 30 mln. EURO for the full existing term of FIEZ (until December, 2038) for the full existing term of FIEZ (until December, 2038) for the full existing term of FIEZ (until December, 2038) not provided · - - 20% 0.2% Angren/Jizzak SIZ Equipment/Materials / Components from 3 to 7 years depending on investment volume from 3 to 7 years depending on investment volume from 3 to 7 years depending on investment volume not provided · (not produced in Uzbekistan) In accordance with the list approved by Cabinet of the Ministers. under the condition of contributed investment amount: · 3 years: from 0.3 ~ 3mln. USD · 5 years: over 3 ~ 10 mln. USD · 7 years: over 10 mln. USD Different rates based on the type of components and materials (in% customs value) 20% 0.2% State Localization Program (not produced in Uzbekistan) over 33% under the condition of localization ratio until January 1, 2017 Different rates based on the type of components and materials (in% customs value) until January 1, 2017 until January 1, 2017 not provided · Equipment / Spare parts Components In accordance with decision of Special Interdepartmental Commission · until January 1, 2017 (with the possibility of further extension) % % % % exemption exemption exemption exemption Tax (VAT) Conditions: Excise Tax (clearance) for imported: Import Duty Value-added Customs Fee Incentives and Preferences Exempted from customs duties duties Customs TAX & CUSTOMS PREFERENCE CONDITION CUSTOMS PREFERENCES

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 041

Continued 5% 4% 8% 20% 7.5% 1.4% Navoi FIEZ from 7 to 15 years depending on investment volume from 7 to 15 years depending on investment volume from 7 to 15 years depending on investment volume from 7 to 15 years depending on investment volume from 7 to 15 years depending on investment volume not provided 5% 4% 8% 20% 7.5% 1.4% Angren/Jizzak SIZ * For goods aimed for export – not assessed from 3 to 7 years depending on investment volume from 3 to 7 years depending on investment volume from 3 to 7 years depending on investment volume from 3 to 7 years depending on investment volume from 3 to 7 years depending on investment volume not provided 5% 4% 8% 20% 7.5% 1.4% State Localization Program until January 1, 2017 (* for the part of goods produced by localization project) until January 1, 2017 (* for the part of goods produced by localization project) until January 1, 2017 (* for the Property used to produce localizing goods) not provided not provided not provided % % % % % % exemption exemption exemption exemption exemption exemption (VAT) Unified tax Incentives and Preferences Property tax (Income tax) infrastructure (*% of profit) Corporate tax Value-added tax (*% of net revenue) value of fixed assets) (for Small enterprises) (*% of the profit after (*% of the average net deduction of income tax) Tax on improvement and the Republic’s Road Fund development of the social Obligatory contributions to TAX PREFERENCES OTHER TAXES AND MANDATORY PAYMENTS (CONTRIBUTIONS)

042 • 2015/16 Knowledge Sharing Program with Uzbekistan

Continued 25% 0.5% Navoi FIEZ 7 – 8.5 million UZS per 1 hectare from 7 to 15 years depending on investment volume from 7 to 15 years depending on investment volume Profit(Income) tax; Property Tax on improvement and development of the social infrastructure; Unified tax(for SMEs); Obligatory payments to the Republican Road Fund; Obligatory payments Republican off-budget School Fund; Land tax development of

25% 0.5% not provided Angren/Jizzak SIZ 11 – 12.5 million UZS per 1 hectare not provided not provided Profit(Income) tax; Property tax; Tax on improvement and the social infrastructure Unified tax (for SMEs); Obligatory payments to the Republican Road Fund; Obligatory payments Republican off-budget School Fund 25% 0.5% State Localization Program 8.5 – 15 million UZS per 1 hectare not provided not provided Corporate tax (Income tax); Unified tax (for Small Enterprises); Property tax Value-added tax (sales to domestic markets) – 20%; Profit(Income) tax – 7.5%; Property tax – 4%; Tax on improvement and development of the social infrastructure – 8%; Unified tax(for SMEs) – 5%; Land tax – depending on land location; Obligatory payments to the Republican Road Fund – 1.4%; Obligatory payments Republican off-budget School Fund – 0.5%; Unified social payment – 25% (for SMEs 15%) % % mln.UZS per 1 ha. exemption exemption exemption preference) Land tax Incentives and Preferences School Fund : Ministry of Foreign Economic Relations, Investments and Trade to pay (including tax exemption (*% of net revenue) (*% of payroll fund) RESIDENTS ARE EXEMPTED FROM : Unified social payment Obligatory contributions All List of the taxes that we are required to Republican off-budget

Source

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 043 2.3.4.2. Customs Regime

Under current legislature, the participants of the Angren and Jizzakh SIZ are exempt from customs payments (except customs clearance fees) for imports into the territory of zones within the framework of implementation of projects’ equipment, components and materials not produced in the country, according to the lists approved by the Cabinet of Ministers depending on the amount of investments made (on three, five and seven years).

At the same time, the enterprises included in the localization Program (NoPP- 2120 from 04.02.2014), as well as operating in the automotive industry (NoPP-800 from 21.02.2008) are totally exempt from import duties on imported equipment and components for three and five years, respectively, without the approval of any of the lists.

Also due to its special customs regime established on the Navoi FIEZ during the acquisition and delivery of raw materials, components, and subsequent implementation within the country there is a need for repeated customs procedures and payment of funds. In addition, it is necessary to conduct similar procedures when realizing each small or medium part of finished products.

If tax incentives between Navoi FIEZ and Angren and Jizzakh SIZs are compared, the paper assumes that the government gives more priority to the development of the Navoi FIEZ through attracting large-scale investments (at least 3.0 million euros) of potential foreign companies and granting more favorable tax incentives than SIZs.

Moreover, Navoi FIEZ offers its enterprises-participants “one stop” services without needing to go outside the zone, including financial, banking, tax, customs, transportation, logistics and consulting services, in order to save their time, effort and expenditure, and enable them to focus primarily on their business.

Land plots in the territory of Navoi FIEZ are provided to participants and other economic establishments of the zone by Directorate of FIEZ for lease at fixed reasonable prices with the approval of the Administrative Board.

2.3.4.3. Key Government/Public Agencies

According to the Presidential Decree on the establishment of the Navoi FIEZ, the Administrative Board, which is composed of senior officials from central and local government bodies, coordinates and carries out government regulations of a

044 • 2015/16 Knowledge Sharing Program with Uzbekistan SEZ through fulfilling the following tasks:

• Selection of investors for placement in Navoi FIEZ, determining the basic terms of investment agreement; • Coordination of activity of the agencies of state management and local agencies of state power concerning matters related to operation of Navoi FIEZ; • Determining the cost of lease of land plots, and also buildings and structures being in state ownership; and • Approval of construction projects of production infrastructure of NavoiFIEZ, financed at the expense of centralized sources.

As a working body of the Administrative Board, the Ministry of Foreign Economic Relations, Investments and Trade (hereafter - MFERIT) prepares the necessary analytical materials for meetings of the Administrative Board, generalizing information and conclusions, corresponding state ministries, agencies and departments of economic management.

Moreover, MFERIT carries out measures on the formation of favorable investment climate and attraction of foreign investments into Uzbekistan economy, rendering necessary informational support to foreign investors, conducting analysis of foreign direct investment flows, investigating international experience of FDI attraction and stimulation, and preparing proposals on the improvement of the normative legal base in the sphere of attracting foreign investments.

The Directorate of the Navoi FIEZ, which is established in accordance with the Presidential Decree and formulated by the Administrative Board, takes responsibility for conducting the operational management activities of the zone. The main functions of Navoi FIEZ Directorate are the:

• Coordination and operational management of Navoi FIEZ; • Management of social and economic infrastructure of Navoi FIEZ; • Preparation and conclusion of agreement on investment in Navoi FIEZ; • Preparation of necessary documents for state registration on a contractual basis; • Maintaining a register of Navoi FIEZ participants; • Granting and creation of contracts on land lease of Navoi FIEZ; • Consulting participants of Navoi FIEZ, as well as assistance in obtaining visas, temporary residence permits, employment permits for foreign citizens in Navoi FIEZ.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 045 For the primary purpose of providing one-stop informational and all other possible support to foreign investors in Uzbekistan, “Uzinfoinvest”, the Information Support & Foreign Investments Promotion Agency, was established in 2007 by the initiative of the President of the Republic of Uzbekistan. It is an independent institution (legal entity) under the Ministry of Foreign Economic Relations, Investments and Trade.

The primary goals of the Agency are the further enhancement of the process of foreign direct investments attraction, broader disseminations abroad of information relating to investment opportunities, informing foreign businesses more widely about advantages of the investment environment established in Uzbekistan.

Main tasks of the Agency:

• Increasing awareness and carrying out explanatory works among foreign businesses and mass media concerning the economic and resource potential of Uzbekistan and favorable conditions created in the republic for attraction of foreign investment. • Information support for foreign investors, providing them with information about prospective projects, legislation regulating investment activity, incentives and preferences for foreign investments in Uzbekistan. • Organization of meetings and negotiations between foreign investors and domestic entrepreneurships for the implementation of mutually beneficial projects in Uzbekistan. • Forming and supporting a positive international image of Uzbekistan by carrying out promotional events abroad (exhibitions, forums, presentations, conferences and workshops), publishing special literature, leaflets and creating special informational web site.

Furthermore, According to the Decree of the President of the Republic of Uzbekistan #PP-2463 dated December 31, 2015, under the Ministry of Foreign Economic Relations, Investments and Trade, two foreign trade companies, namely JSC “Uzsanoateksport” and “Uztadbirkorexport”were established by reorganizing JSC "Markazsanoateksport" and JSC Uzprommashimpeks" and other state foreign trade companies.

The main functions of the company are to promote the enterprises of machine building, metallurgical, chemical and petrochemical industry, building materials industry and other industrial structures in promoting their products for export.

046 • 2015/16 Knowledge Sharing Program with Uzbekistan Given that the JSC "Uzsanoateksport" and "Uztadbirkorexport" are subordinate companies of MFERIT, the Ministry annually consolidates these companies for every resident of Navoi FIEZ in order to promote their products for export.

Equally, in accordance with the decree of the President of the Republic of Uzbekistan from August 8, 2013 NoPP-2022 "On additional measures on support of exports of small business and private entrepreneurship" under the National Bank of Uzbekistan created Foundation for export support of small business and private entrepreneurship.

The main purpose of the Foundation is to further expand the export potential of small businesses and private entrepreneurship, providing necessary legal, financial and organizational assistance in increasing production of competitive products for global markets and promoting them for export, along with ensuring the reliable protection of native entrepreneurs-exporters from the risks of changes in the external market.

2.4. Current Situation and Performance of the Navoi FIEZ

According to the decision of the Administration Board dated November 20, 2009, on industrial placement of enterprises in the Navoi FIEZ, priority was given to the establishment of a wide range of facilities for the manufacturing of high- tech and globally competitive products by introducing modern high-performance equipment and machinery, manufacturing lines and modules as well as innovative technologies in such industries:

• Electro-technical goods and telecommunications equipment; • Precision machinery and component parts for automobiles; • Pharmaceutical products and medical equipment; • Food processing and packaging industry; • Plastic and polymeric goods.

2.4.1. Investment Performance

Since the establishment of the “Navoi” FIEZ, the Administration Board has the approved investment applications of a total of 30 projects in the “Navoi” FIEZ. To date, 24 investment projects, with a total cost of 130.9 million USD, have been implemented by 19 resident enterprises in the FIEZ. In particular, 17 investment projects have been implemented with the participation of 35.4 million worth of FDI.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 047 [Figure 1-3] Total Investment and FDI Share in the Navoi FIEZ

(Unit: million USD, %) 50 50%

40 40%

30 30%

20 20%

10 10%

0 0% 2010 2011 2012 2013 2015 Total Investment FDI share

Source: the Directorate of Navoi FIEZ.

An analysis of implemented projects by industries indicates that investments were primarily directed to high-technology industries such as automobile components (40% of total investment volume), electro-technical products (31.5%), plastic/polymeric goods (12%), and telecommunications equipment/devices (6%).

Composition of Investment Projects in the Navoi FIEZ

Industry Number of projects Total cost of project Automobile components and spare parts 8 52.5 mln. $ Electronic & electro-technical products 6 41.2 mln. $ Telecommunications equipment and devices 3 7.4 mln. $ Plastic and polymeric goods 3 15.8 mln. $ Cosmetic and hygienic products 2 6.3 mln. $ Pharmaceutical products 1 3.7 mln. $ Food storage 1 4.0 mln. $ TOTAL 24 130.9 mln. $

Source: the Directorate of Navoi FIEZ.

Among resident enterprises, several firms exist that are equipped with the most modern and high technology manufacturing facilities not only in Uzbekistan but also in Central Asia, notably JV “HPC Systems” (high-voltage cables), JV “Ko-UNG Cylinder” (gas cylinders for automobiles), and food storage “Agro Fresh” (cooling system of controlled gas environment).

048 • 2015/16 Knowledge Sharing Program with Uzbekistan When the Navoi FIEZ was established, in order to attract foreign investment, the Uzbekistan Government, particularly the Ministry of Foreign Economic Relations, Investments and Trade held numerous business forums and presentations on the promotion of Navoi FIEZ in various international conferences and bilateral meetings, as well as organizing visits to Navoi FIEZ for foreign business companies and delegations.

Certainly, these activities initially provide some positive results. A number of foreign companies and local state enterprises expressed their interest in forming manufacturing branches in the Navoi FIEZ. Consequently, ten resident enterprises (more than 50% of total amount of residents) started their production activities in the initial years (2010-2011).

At present, the People’s Republic of China (five projects with a share in total FDI – 57%), the Korean Republic (four projects, 29%) and Italy (two projects, 7%) are the most significant foreign investors in the Navoi FIEZ.

Composition of FDI in the Navoi FIEZ

Country of origin Number of projects FDI volume People’s Republic of China 5 20.1 mln. $ Korea 4 10.3 mln. $ Italy 2 2.4 mln. $ India 2 1.5 mln. $ Singapore 2 0.2 mln. $ Great Britain 1 0.5 mln. $ United Arab Emirates 1 0.4 mln. $ TOTAL 17 35.4 mln. $

Source: the Directorate of Navoi FIEZ.

The Navoi FIEZ has the most favorable conditions for companies, producing export-oriented goods, when they use the tax exemptions for the full period of its existence. Analysis shows that the vast majority of residents (almost 90% of total) entering into operation in the Navoi FIEZ, produce import-substitution oriented goods for the domestic market. Therefore, they have less advantage than other special industrial zones enjoy.

The MFERIT, within several international investment and business forums, held several negotiations and discussions aimed at attracting multinational companies

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 049 such as Samsung Electronics, LG Electronics, Lotte Group (Korea), Robert Bosch, Osram (Germany), Sony Corporation, NEC Corporation, Tokyo Electron (Japan), Nokia (Finland), Philips (Netherlands), General Electric, Merck (USA), which had played a significant role in global markets. However, these attempts did not result in reaching agreements on the establishment of manufacturing high-technology export-oriented products in Navoi FIEZ.

In addition, there six investment projects being implemented with a total cost of 68.2 million USD, including with the participation of 37.8 million worth of FDI in Navoi FIEZ. By country of foreign investors, FDI flows from Great Britain (two projects with a share in total FDI volume – 66%), India (one project, 14%), the People’s Republic of China (two projects, 8%). Foreign investor of project of manufacturing solar panels will be identified in accordance with the results of bidding.

Projects will be realized in the sphere of manufacturing plastic and aluminum profiles with a sufficient export potential, as well as electronic energy meters, electro-technical home appliances, solar panels, and medical products for domestic market.

Moreover, the Ministry of Foreign Economic Relations, Investments and Trade together with state companies has been actively taking certain measures for the attraction of potential foreign companies from Korean Republic, the People’s Republic of China and Germany in particular, with the purpose of joining the implementation of investment projects aimed at producing electron gas meters, polymer goods, glass containers and bottles, pharmaceutical products, chargers for mobile phones, etc.

As mentioned above, the total area of Navoi FIEZ is 564 ha, where the Administrative Office of the Directorate and Financial Center buildings, internal railway logistics center, auto-roads, engineering-communication and other social facilities have been constructed by the Government.

According to resolution of the Administrative Board of Navoi FIEZ on April 24, 2009, 21 blocks of land with a total area of 360 ha were clearly defined for the accommodation of production facilities.

Currently, all resident enterprises of Navoi FIEZ, approved by the Administrative Board, occupy 62.6 ha or 17.4% out of the total production area. Of these, a 35 ha area is occupied by operating resident enterprises and 27.6 ha by residents who have been carried out construction works of production facilities and internal engineering-communication networks.

050 • 2015/16 Knowledge Sharing Program with Uzbekistan By industry, manufacturers of plastic and polymer goods, aluminum profiles (25.2 ha with a share in total occupied area of 40.2%), electronic and electro- technical products (20.1 ha, 32.1%) and automobile components, spare parts (9.5 ha, 15.2%) occupy almost 88% of total area of residents.

Occupied Production Areas by Industry

Industry Number of projects Area occupancy (ha) Automobile components and spare parts 8 9.5 Electronic & electro-technical products 9 20.1 Telecommunication equipment and devices 3 0.8 Plastic and polymer goods, aluminum profiles 5 25.2 Cosmetic and hygienic products 2 1.5 Pharmaceutical products 2 3.5 Food storage 1 2.0 TOTAL 30 62.6

Source: the Directorate of Navoi FIEZ.

Analysis of occupancy rate of the residents reveals that it took seven years to occupy 17.4% of total production area of the Navoi FIEZ. There still remains a large undeveloped area (almost 300 ha) for purpose of allocation of manufacturing facilities. Towards this, the issue on allocation of other priority export-oriented industries, such as finished textile products, environmental-friendly building materials, chemical products and glass production should be considered by the Government in order to maximize available opportunities.

2.4.2. Sales/Export Performance

Generally, production activities in the Navoi FIEZ were started in 2011. According to statistical data, since then the total volume of production and export of business entities of the Navoi FIEZ has been increasing year by year. For instance, in 2011, resident enterprises produced goods worth 35.9 billion Uzbek Soums (hereafter UZS) (equivalent to 20.0 million USD at the prevailing currency rate) and, by the end of 2015, production volume had increased 3.3 times and amounted to the equivalent of 66.0 million USD. Production capacities of current residents forecast for 2016 a production volume amounting to the equivalent of 97.0 million USD with an increase of 47%.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 051 As mentioned above, a significant proportion of residents operating in the Navoi FIEZ produce import-substitute products. According to statistical data, in 2011, export volume amounted to 193 thousand USD with a share of 1.0% in total production volume. By the end of 2015, export of the Navoi FIEZ increased 27 times and amounted to 5.1 million USD with share of 7.8% in total production volume.

In 2011, only one resident exported, by the end of 2015, four resident enterprises were involved in export activity. In 2012-2013, the share of export in total production volume declined, after commissioning, production of high- voltage cables in 2013 export volume started to increase sharply.

According to the forecast for 2016, more than ten resident companies will export products amounting to 11.5 million USD, with an increase of 2.2 times.

Recent Trends in Production and Export of Navoi FIEZ

years 2016 2011 2012 2013 2014 2015 Status (forecast)

Manufacture volume 20,011.7 39,990.7 44,293.7 57,559.9 65,967.0 97,123.7 (in thousand USD)

Export volume 193.0 50.2 216.0 1,544.0 5,145.0 11,515.9 (in thousand USD)

Share of export 1.0% 0.1% 0.5% 2.7% 7.8% 11.9% (in% out of total sales)

Source: the Directorate of Navoi FIEZ.

above, shows that the internal market is the primary market for Navoi FIEZ residents. For instance, automobile components and spare parts have stable customers; however, for their further development to be strong depends on JV “GM Uzbekistan”. We can also include telecommunications equipment and devices into such a scenario, since their activities are associated with the State Telecom Company “Uzbektelecom”.

Aluminum wires of JV “Navoi Cable Connector” and gas cylinders of JV “Ko-UNG Cylinder” independently, have been building up their niches in the internal market. Moreover, the high-voltage cables of JV “HPC Systems” have been expanding their export market. Other residents are, however, facing difficulties in finding their stable markets.

052 • 2015/16 Knowledge Sharing Program with Uzbekistan Analyses of the Navoi FIEZ exports in 2014-2015 indicate that the beginning of the export of high voltage cables, the share of which comprised 89%, caused a sharp increase of total exports for the Navoi FIEZ.

Export Volume of Major Products in Navoir FIEZ

Export volume in Share in total export Product name 2014-2015 (in%) (thousand USD)

High voltage cables 5,963.4 89.2%

Automobile components and spare parts 586.2 8.8%

Baby diapers and hygienic products 86.4 1.3%

Fresh fruits and vegetables 53.0 0.8%

TOTAL 6,689.0 100%

Source: the Directorate of Navoi FIEZ.

For the period under review, Navoi FIEZ products were primarily exported to Turkey, the share of which in total export volume is 84.5%, Russia (8.2%), UAE (2.4%), Turkmenistan (2.2%), the Korean Republic (1.4%) and Kazakhstan (1.3%).

According to the Navoi FIEZ, automobile components and fresh fruit with a share of 10% in total exports were delivered by air, and the rest (90%) were exported by auto-roads. In spite of enormous potential of a railway logistics center operating inside the Navoi FIEZ, resident enterprises did not use this type of transportation for export purposes.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 053 3. Survey Analysis Targeting Resident Companies in the Navoi FIEZ 3.1. Overview

This survey was designed to collect the data necessary to describe the basic characteristics of resident companies within the Navoi FIEZ and their perception/ evaluations on investment climates and government's policies. The survey is conducted under the support of the Navoi Directorate and MFERIT. There are currently 19 companies operating within the zone. Since the data population is small, we aimed for complete enumeration rather than sampling. With close cooperation with the Navoi Directorate and MFERIT, we were able to receive responses from all firms at the Navoi FIEZ. Therefore, the response rate is 100%.

In-depth interviews with nine companies and the Navoi Directorate were carried out prior to the survey during 3-5 February, 2016 at Navoi, in order to design the survey questionnaires in a more relevant and effective manner. It transpired that the interview results are largely consistent with the survey outcomes.

The actual survey was carried out during 4-16 March, 2016. It took the form of an online survey in Russian and the survey responses were received directly from respondents on a real-time basis. The survey questionnaires are designed to be responded to by a CEO or a manager who fully understands the company’s overall status such as human resources, technology, financial situation etc. Initially, CEOs or managers from foreign investors were preferred as respondents in order to evaluate investment climates more objectively from an overseas view. Unfortunately, however, there are only a few foreign managers currently residing at Navoi and consequently most of the respondents are domestic.

The survey questionnaires consisted of three parts.3) The first part focuses on corporate activities such as business type, sales/purchase structure, mode of transportation, etc. The second part deals with investment decision in Navoi; major reasons for investing in the Navoi FIEZ, form of business at the initial stage, existence of foreign affiliates in Uzbekistan, type of domestic investors, relationship with foreign investors, evaluations on investment climates at Navoi, own perceptions on international competitiveness. Finally, the third part aims at evaluating the government's policy.

3) We have attached survey questionnaires in the appendix, translated into English. The actual survey was conducted in Russian.

054 • 2015/16 Knowledge Sharing Program with Uzbekistan 3.2. Survey Results

3.2.1. Type of Resident Enterprises

A majority of incumbent firms in the Navoi FIEZ are domestic-foreign joint ventures. Among the 16 companies that provided information on equity structure, two firms are domestic, one firm is wholly owned by foreign investors, and the remaining 14 companies are domestic-foreign joint ventures. One interesting finding is that 9 out of 14 joint ventures maintain equal equity shares between domestic and foreign investors. The foreign investors are from China, Korea, Italy, India, Singapore, the UK, and the UAE, as presented in

. Conversely, domestic investors consist of 14 public enterprises and only 3 private firms.

[Figure 1-4] Composition of Firms by Equity Structure

No answers 2

Wholly-owned by foreign 1

Wholly-owned by domestic 2

JV of domestic majority 1

JV of foreign majority 3

JV of equale qultyshare 9

0 2 4 6 8 10

About half of the firms were established during the first two years (2009- 10) after the start of the Navoi FIEZ, and the rest were set up later. A total of 70% of the firms are new start-ups in Uzbekistan and the remaining 30% have foreign affiliates in Tashkent, Andijan or Kashkadarya. The latter mostly produce automobile components/parts or electronic and electro-technical products.

In regards to workers' composition, respondents answered that they predominantly employ male workers. Female workers are usually engaged in cleaning, cooking, accounting, or other maintenance/secretarial duties. Workers consist of engineers and production workers. Engineers are university graduates or higher, while production workers are mostly college-graduates or lower. Foreign workers/managers residing at Navoi are unusual and their share in total employment is a mere 1-2%. Domestic workers are mostly from Navoi. Finally, without exception, a firm’s employment size is lower than 100, as depicted in [Figure 1-5].

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 055 [Figure 1-5] Number of Workers

6 5 5 4 4 4 3 3 2 2

0 Less than 25 26-50 workers 51-75 workers 76-100 workers No answers

A majority of firms engage in processing/manufacturing rather than simple assembly. As regards industrial composition, automobile components/parts, electronic/electro-technical products, telecommunications equipment and devices take the lion's share, and there are a number of companies producing plastic/ polymeric goods, cosmetic/hygienic products and pharmaceutical products.

3.2.2. Investment Climates

We asked respondents what their priority consideration was when deciding to move into the Navoi FIEZ. The most frequent answer (61% of all responses) is "favorable government's support scheme including tax relief, financial support etc." The significant reasons are "easy access to the major customer enterprises and the market" (28%) and "excellent infrastructure condition in terms of logistics/ transportation etc." (11%)

We also asked what could have been an investment option if the Navoi FIEZ had not been established. The purpose of this question is to determine whether or not an investment creation effect existed. As presented in [Figure 1-6], 44.4% of respondents report that they would have abandoned new investments. Another 22.2% indicate that they would have invested abroad. This implies that there clearly exists an investment creation effect, because they would have not implemented investment projects in absence of the Navoi FIEZ.

Survey results indicate that respondents are generally satisfied with investment climates, especially compared with other regions in Uzbekistan. The most satisfactory factor is "government incentive scheme;" 38.9% of respondents answer that it is ‘excellent”, and 55.6% report that it is "good" compared to other regions. The next satisfactory factor is “convenient infrastructure”. As depicted in [Figure 1-7], the other investment environments are also quite satisfactory, even for living

056 • 2015/16 Knowledge Sharing Program with Uzbekistan conditions in Navoi. These results are quite in contrast with the common perception that the Navoi FIEZ would be disadvantageous due to the long distance from Tashkent area, which is the economic center of Uzbekistan.

[Figure 1-6] Investment Options in Absence of Navoi FIEZ

50% 44.4%

40%

27.8% 30% 22.2%

20%

10% 5.6%

0% Abandonment of new Investment in other Investment abroad Others investment Uzbek regions

[Figure 1-7] Investment Climates Relative to Other Regions in Uzbekistan

Living conditions 27.8% 50.0%

Production workers 33.3% 33.3%

Technical/skilled workers 16.7% 50.0%

Linkage with associated firms 25.0% 43.8%

Proximity to suppliers 29.4% 23.5%

Easy acess to market 44.4% 22.2%

Infrastructure 50.0% 27.8%

Rent charge 38.9% 27.8%

Incentive scheme 38.9% 55.6%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Excellent Good Similar Poor Very poor

As mentioned above, despite the continuous efforts put in by the government of Uzbekistan to revitalize foreign investments in Navoi FIEZ, the actual level of foreign investment in Navoi FIEZ is relatively low in relation to its potential. In this respect, we asked respondents what would be the main factors attributable to sluggish FDI inflows into the Navoi FIEZ. The results are shown in [Figure 1-8].

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 057 About half of respondents perceive that "global recession" is the most significant source for low investment inflows in the Navoi FIEZ. Another 29.4% of respondents report that "excess regulations on foreign exchange control/customs" are a main impediment for FDI attraction. Other factors include "lack of differential incentives compared with other areas", "geographical characteristics of the market and the Navoi FIEZ distant from the major markets", and "the existence of new special industrial zone such as Angren, Djizak."

[Figure 1-8] Major Reasons for Sluggish FDI Inflows into Navoi FIEZ

Excess regulations on exchange 29.4% control/customs

5.9% Distance from major market

Lack of differential incentives 11.8%

Competing SIZs in Angren & Djizak 5.9%

Global recession 47.1%

0% 10% 20% 30% 40% 50%

3.2.3. Governmental Supporting Measures

Respondents are asked to rank government support policies for Navoi FIEZ in order of benefits delivered to their own company from: the most beneficial (1), to the least beneficial (6). Again, companies at Navoi regard "various tax incentives" as the most beneficial governmental support, followed by "custom & tariff benefits." Conversely, "financing and financial assistance such as grants and preferential loans" appears to be relatively weak.

[Figure 1-9] Perceived Benefits for Government Support Measures

Financial assistance 31.3% 18.8% 50.0%

One-stop service 13.3% 6.7% 53.3% 13.3% 13.3%

Custom & tariff benefits 25.0% 43.8% 18.8% 12.5%

Rent reduction 7.7% 23.1% 7.7% 30.8% 30.8%

Tax incentives 53.9% 30.8% 7.7% 7.7%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Most important Important Neutral Less important Least important

058 • 2015/16 Knowledge Sharing Program with Uzbekistan Firms' perceptions of the most urgent measures needed to increase FDI inflows are diverse. Relatively more frequent responses are "Easing foreign exchange control" and "differential incentive system compared to other regions", followed by "improving customs benefits/procedure."

[Figure 1-10] Government Policies Needed for Improvement

Improving living conditions 5.9%

Expanding promotion activities 5.9%

Attracting leading MNEs 11.8%

Lowering minimum investment 11.8% requirement

Easing foreign exchange control 23.5%

Improving customs bene fits/ 17.7% procedure

Differential incentive system 23.5%

0% 5% 10% 15% 20% 25%

3.2.4. Exports

While the government of Uzbekistan generally welcomes investment projects that are in line with its import-substitution and export-oriented industrialization policy, most of companies operating in the Navoi FIEZ produce import-substitute products and their exports activities are currently relatively weak. In fact, products are mostly destined for the domestic market. A total of 17 companies report that their main customers are domestic firms. Half of respondents report that they serve only domestic markets and do not export their products at all. Only one firm is currently exporting more than 50% of their production. This situation is at odds with the objective of the Navoi FIEZ, since export promotion is one of its key policy targets.

[Figure 1-11] Export Activity

60 50.0% 50

40 33.3% 30

20 11.1% 10 5.6%

0 No exports Less than 10% More than 50% No answer

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 059 There are many possible explanations behind such weak export activities in the Navoi FIEZ. One plausible reason would be lack of international competitiveness of resident firms at Navoi. According to survey results, however, almost 80% of survey respondents report that they could be competitive, both in price and quality competition, in the world market. The rest of respondents reply that they are competitive either in price or in quality.

[Figure 1-12] International Competitiveness

100%

77.8% 80%

60%

40%

20% 16.7% 5.6% 0.0% 0% Both in price and quality Price only Quality only Neither

Another potential explanation for weak export performance in the Navoi zone could be the existence of constraints related to trade facilitation, transit and logistics. These constraints tend to be particularly conspicuous for landlocked countries. According to WBI (2008), transport costs for landlocked countries are almost 50% higher than for coastal economies, and these extra costs largely stem from transit/logistic problems.

On the other hand, as mentioned, one prominent advantage of the Navoi FIEZ is its air transport-logistic potential. Since 2009, Korean Air Cargo has been managing the Navoi international airport and has facilitated the modernization program. In 2010, the largest air cargo terminal in Central Asia, which could handle 100,000 tons of cargo annually, was constructed. Therefore, Uzbekistan, as a doubly landlocked country, could take much advantage of air transportation to boost its exporting activities.

Survey results indicate that products are primarily destined for customers through road transportation, and air transportation is seldom used. As presented in [Figure 1-13], almost 90% of respondents report that road transportation is their main means of transport to supply products into the market. This is due to the fact that, as mentioned, products are mainly destined for domestic markets and thus road transportation is the most cost-effective mode of transport. However, air transport is used to a limited extent for the export of cherries, melons, automobile parts, etc.

060 • 2015/16 Knowledge Sharing Program with Uzbekistan [Figure 1-13] Major Transportation Mode

A. Product Sales B. Input Purchase

5.6% 5.6% 5.6% 5.6%

27.8% 16.7%

88.9% 61.1%

Road transport Rail transport Air transport Others

As regards the supply of raw materials and parts/components, more than a half are imported from abroad, especially from China, Korea and India. In this case, the main mode of transport is railroad and maritime transportation. Air transport is used irregularly for importing parts/components of production equipment when replacement or repair is needed.

Finally, we also asked respondents the reason why they do not generally utilize air transportation. Around 40% of respondents report that their products are not suitable for air transport because the products are heavy and bulky. The rest of respondents generally regard high costs as a major reason for low usage of air transport.

[Figure 1-14] Reason for Low Usage of Air Transport

Simply too high costs 33.3%

Suitable, but too high costs 22.2%

Not prohibited, but not suitable for 38.9% air transport

Prohibited items for air transport 5.9%

0% 10% 20% 30% 40% 50%

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 061 4. Policy Evaluations and Recommendations

So far, we have closely examined the current institutional framework and investment/export performances of the Navoi FIEZ. The survey results targeting resident companies were also discussed. In the following, based on such observations, we provide overall policy evaluations and a number of policy suggestions to improve investment climates and export performance of the Navoi FIEZ.

4.1. Policy Evaluations

4.1.1. Comparisons between Masan SEZ and the Navoi FIEZ

In 2009/10 KSP between Korea and Uzbekistan, the Masan Free Trade Zone (FTZ hereafter) was considered as a reference model for the Navoi FIEZ. Indeed, the Masan FTZ has been regarded as one of the most successful SEZs in the international community. The Masan FTZ was established in 1970 as part of the national economic development strategy. As mentioned in 2009/10 KSP report, the Masan FTZ accounted for less than 0.2% of the total industrial complex areas in Korea; it produced 13-15% of overall surplus of the Korean economy as of 2009.

There are currently more than 80 companies operating within the zone, including multinational enterprises such as Sony, Nokia, Casio, and TT Korea from Sanyo group. As shown in [Figure 1-15], the total investment in the Masan FTZ has increased on an annual basis from 1.4 million USD in 1970 to 0.2 billion in 2014. At the early stage, the lion's share of total investment was provided by foreign investors. Later on, domestic firms increased investment in the Masan FTZ and thus the FDI share in total investment has declined to 56.7% in 2014.

062 • 2015/16 Knowledge Sharing Program with Uzbekistan [Figure 1-15] Investment Trend in the Masan FTZ

(Unit: Million USD, %) 300 100%

250 90%

200 80%

150

70% 100

60% 50

0 50% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Total Investment FDI share

Source: Masan FTZ Office.

[Figure 1-16] shows export performance of the Masan FTZ. Its export volume has increased from 0.9 million USD in 1971 to 3.2 billion in 2011. During 1971- 91, exports from the Masan FTZ accounted for 2-4% of total national exports. Nowadays, a majority of the total production is for export, particularly in electronic equipment and parts/components. Foreign exchange earnings resulting from exporting activities have also increased, even though the earning rate itself has shown a declining trend since the 1990s, largely due to the increase of domestic wages and the expansion of global production networks. As of 2011, the foreign exchange earning rate is around 31.6% of total export revenues. Around half of foreign exchange earnings come from taxes and public utility charges, and the other sources are the purchase of domestic intermediate goods (34.4%), Wages (10.8%), and rental fees (0.2%).

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 063 [Figure 1-16] Export Performance in the Masan FTZ (Unit: Million USD, %) 5,000 60%

50% 4,000

40% 3,000

30%

2,000 20%

1,000 10%

- 0% 1971 1976 1981 1986 1991 1996 2001 2006 2011

Total exports (left-axis) Foreign exchange earning rate

Source: Masan FTZ Office.

, we compare the current status of the Navoi FIEZ with the Masan FTZ at the early stage of development in the 1970s. Firstly, the Navoi FIEZ welcomes all types of firms, whether domestic or FDI firms, as long as they belong to pre- determined list of priority hi-tech industries. On the other hand, for the Masan FTZ, at the initial stage, only FDI firms were allowed to locate within the zone. During the 1970s, more than 90% of the firms were foreign investment companies, and the proportion remained at 80% in the 1980s, even though the Masan FTZ started to allow domestic companies to operate within the territory of the FTZ.

Comparisons between Masan FTZ and Navoi FIEZ

Navoi FIEZ Masan FTZ

Target firms Both domestic and FDI firms Restricted to FDI firms

Target sectors Pre-determined All sectors

Production Processing/manufacturing Assembly (sub-contracting)

Male workers Female workers Employment (semi-skilled/unskilled) (unskilled)

Sales Mostly domestic markets Exports

Transport mode Ground Ground + Maritime

Occupancy Sluggish Speedy

064 • 2015/16 Knowledge Sharing Program with Uzbekistan This difference stems from a difference in policy objectives between the two zones. The policy objective of the Masan FTZ was clearly oriented as export promotion, while the Navoi FIEZ pursue both import substitution and export promotion.

Other critical differences are employment structure and production characteristics. The Masan FTZ was established at a time when Korea had a surplus of labor, and thus employment creation is one of the major objectives for the Masan FTZ. In contrast, Japan, the main investors in the Masan FTZ, suffered from high labor costs in the domestic market and thus needed to outsource good-quality cheap labor from abroad. At that moment, the wage levels of female workers were around half of their male counterparts. Consequently, female workers consisted of around 75% of the total employment in the Masan FTZ during the periods of 1970s and ‘80s and their tasks were mostly simple assembly-type work for export (See [Figure 1-17]). Conversely, in case of the Navoi FIEZ, the current production direction is largely that of import substitution to serve the domestic market, which requires the processing of local raw materials to produce the final goods.

[Figure 1-17] Employment Structure of the Masan FTZ

100% 40,000

90%

30,000 80%

70% 20,000 60%

50% 10,000

40%

30% 0 1971 1976 1981 1986 1991 1996 2001 2006 2011

Total employment (Right-axls) Share of Female workers

Source: Masan FTZ Office.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 065 Finally, [Figure 1-18] depicts a survey result for investors concerning factors motivating FDI in the Masan FTZ at the initial stage of the establishment of the zone. Here, we can see both some similarities and differences in investment decision compared to the Navoi FIEZ. In case of the Masan FTZ, at the initial stage the most important factors were low wages and tax exemptions, followed by locational advantage. Serving the domestic market was clearly not an important factor for investment decision.

[Figure 1-18] Factors Motivating FDI in the Masan FTZ

5.4% Domestic market exploration 3.6% 8.9% 33.9% 48.2% 7% Superiorlocation 24.6% 45.6% 19.3% 8.8%

Active promotion 20.8% 37.5% 27.1% 6.3% 8.3%

Tax exemptions 42.1% 38.6% 14.0% 5.3%

High quality of labor 7% 19.3% 50.9% 24.6% 3.5% 3.5% Low wages 45.6% 31.6% 15.8% 3.5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Strong Agree Agree Neutral Disagree Strongly disagree

Source: Oh (1993).

4.1.2. Overall Interim Evaluations

As shown in [Figure 1-8], the Navoi FIEZ companies perceive that the "global recession" is the most significant source for low investment inflows in the Navoi FIEZ. In relation to this, we empirically estimate the correlations between FDI inflows and GDP growth for the periods of 2000-13 and compare a number of countries in the world. The estimation results are presented in

. All the variables are calculated as a three-year weighted sum of annual growth rates.

The results indicate that FDI inflows into Uzbekistan are highly correlated with world GDP and investment growth. Correlation coefficients with these variables are relatively higher for Uzbekistan in comparison to other countries such as Kazakhstan, India and Russia. This implies that the recent sluggish FDI inflows into Uzbekistan are indeed largely explained by the global economic conditions.

066 • 2015/16 Knowledge Sharing Program with Uzbekistan

Correlation of FDI inflows with GDP and Investment (2000-2013)

World_ Domestic_ World_GDP Domestic_GDP investment investment

Uzbekistan 0.6434 -0.0671 0.6572 0.6770

Kazakhstan 0.5593 0.5267 0.4762 0.7195

Russia 0.1481 0.1945 0.1690 0.3844

China 0.0980 0.7139 0.0841 0.5362

India 0.5132 0.3432 0.4393 0.3467

Korea 0.2305 -0.2093 0.3295 -0.0723

Singapore 0.1378 0.6151 0.1575 -0.0632

Vietnam 0.2142 0.5231 0.2293 0.5609

Note: All the variables are calculated as a 3three-year weighted sum of annual growth rates. Source: UNCTAD database.

Landlocked countries often face various types of difficulty, not only for exports but also for inward foreign direct investment. High transport costs impede access to global production network and trade linkages, and reduce the attractiveness of landlocked countries as FDI destinations. According to Sachs(1997), the growth rate of landlocked countries is reduced by 0.7-1.0% as a direct result of their being landlocked.

As shown in

, the share of FDI in gross fixed capital formation for landlocked countries in 2013 is 15.2%, which is higher than the world average. As regards the size of FDI per capita, in contrast, landlocked countries are around 63 US dollars in 2014, while developing and developed countries are 129 and 474 USD, respectively.

In the case of Uzbekistan, FDI stock has increased 12.9 times during the period of 2000-14, which could be regarded as quite impressive in comparison with other regions/countries. However, at the same time, Uzbekistan still has many requirements to improve its FDI attraction. The share of FDI in gross fixed capital formation for Uzbekistan in 2013 is a mere 3.9%, and its size of FDI per capita was, at best 26 dollars, in 2014. Furthermore, if FDI stock per GDP is compared, Uzbekistan (14.5%) remains at a relatively low level. The average FDI stock per GDP for the world is 32.8%, and the percentage for landlocked countries is 24.3%, which is substantially higher than Uzbekistan.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 067 Therefore, the government of Uzbekistan needs to improve further investment environments and related institutional systems. Such policy efforts are particularly important, especially for the Navoi FIEZ, because it is an extremely symbolic policy for FDI attraction in Uzbekistan.

FDI in Landlocked Countries: International Comparison

Percent% of FDI Inflows, FDI Stock, FDI Stock Gross Fixed per capita percent% of GDP Growth, 2000=1 Capital Formation (USD, 2014) (%, 2014) (2014) (%, 2013)

World 8.7 181 32.8 3.4

Developed 7.8 474 34.2 2.8

Transition 15.3 160 27.7 12.6

Developing 9.1 129 31.1 5.0

LDCs 10.7 25 24.3 6.0

SIDs 27.4 356 90.8 4.7

LLDCs 15.2 63 24.3 8.4

Uzbekistan 3.9 26 14.5 12.9

Kazakhstan 19.5 576 62.9 12.8

Kyrgyzstan 28.4 37 48.4 8.2

Mongolia 42.1 176 148.6 91.9

Note: LDCs- Least Developed Countries, SIDs-Small islandIsland developing Developing sStates, and LLDCs- Landlocked developing Developing countries Countries. Source: UNCTAD database.

Recently UNDP & IFMR (2015) suggest urgent improvements in FDI policy for the following areas:

• No function assigned to the Zone Directorates for independent search and FDI attraction • Absence of a databank on potential investors/projects as well as weak advertising • Lack of Investor care services • Lack of qualified SEZs specialists • Weak distinction between SEZs and other regions on tax incentives for foreign investors

068 • 2015/16 Knowledge Sharing Program with Uzbekistan • Bias in FDI incentives toward industrial sectors • Difficulties in obtaining credits, particularly lack of specialized banks • Insufficiently developed infrastructure • Practical hurdles in investment procedures • Further unification and simplification needed in the legislation about SEZ

Finally,

presents our overall evaluations on the current status of the Navoi FIEZ, based on aforementioned analytical results. As for evaluation criteria, we adopt UNESCAP (2005)'s approach. UNESCAP (2005) divides evaluation criteria into two factors: macroeconomic factors and location/operational factors. Then, for each factor, several sub-criteria are also classified, as shown in

Overall Evaluations on the Current Status of the Navoi FIEZ

Criteria Evaluation

A clear foreign investment policy regime ◌

Restriction-free and duty-free access to imported inputs and capital ◎ goods

Rapid, low-cost customs clearance for imports and exports ◌ Macroeconomic factors A completely liberalized foreign exchange regime for EPZ ▲

Speedy Prompt responses to uncomplicated investment applications ◎

Minimal regulatory control of actions and transactions within the ◌ zone

Appropriate site selection and location ◌

Good road infrastructure and availability/proximity to a major port or ◎ an international airport Location and operation factors Availability and good quality utilities and services ◎

Good zone administration and management ◌

Appropriate promotional efforts ▲

Note: ◎ = Very Good, ◌ = Good, ▲= Needs to be improved.

Based these results, we discuss a number of policy suggestions to revitalize the Navoi FIEZ in the following sub-section.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 069 The most important strengths of the Navoi FIEZ as FDI destination are as follows: • Good transport infrastructure and proximity to an international airport • Favorable duty-free access to imported inputs and capital goods • Prompt investment application approval • Availability and good quality utilities and services

In contrast, the policy areas that require immediate improvement are: • Foreign exchange regime for FIEZ companies • More systematic promotional efforts for FDI Attraction

4.2. Policy Recommendations

4.2.1. Re-considering the Identity of Navoi FIEZ

Thanks to recent accelerated globalization and rapid IT technology development, the importance of geography in terms of value added now appears to be declining. Such a significant change has great potential for alleviating the disadvantages originating from geographic distance factors. As the only double- landlocked country in the world other than Lichtenstein, Uzbekistan should, as such take an advantage in this regard through the evolution of further FDI attraction and export promotion.

The initial objective of the establishment of Navoi FIEZ was "to create favorable conditions to attract foreign investment, to organize modern high-tech production for the manufacturing of products that meet world standards and demand in world markets." As mentioned, the Navoi FIEZ generally welcomes investment projects that are in line with its import-substitution and export-oriented industrialization policy but, in reality, most of the existing companies produce goods destined for the domestic market. Consequently, export activities within the zone are currently very weak. Furthermore, one of the most important advantages for the Navoi FIEZ is a high potential to utilize air transport-logistics, but the actual usage has been quite limited. Even though global recession appears to be the most critical factor for limited investment performance of Navoi, it is still imperative that investment climates of the Navoi FIEZ should be improved for further development. It has been seven years since its establishment, but the occupancy rate remains at 17.4%.

We have formulated two different scenarios for the direction of the Navoi FIEZ. The first is to put focus less on export promotion and encourage investments that make use of local contents and are not heavily dependent on imported inputs and materials. One of the shortcomings for this option is that then the Navoi FIEZ could not be much differentiated from Angren/Djizak SIZs, especially in terms of policy objectives and thus of zone identity.

070 • 2015/16 Knowledge Sharing Program with Uzbekistan Furthermore, in this scenario, investment thresholds to be eligible for tax exemptions in the Navoi FIEZ have to be lowered. Currently, firms in the Navoi FIEZ should invest more than three million euros to benefit from tax exemptions, while the lowest investment threshold for tax exemption in Angren/Djizak SIZs and other regions is 0.3 million USD.

The second scenario places more emphasis on export promotion in the Navoi FIEZ and re-alignments of incentive schemes. In this scenario, the most important policy is the attraction of leading MNEs (so-called "Anchor companies") in the world, especially those that produce goods suitable for air transportation. These could include electronic devices, parts/components, pharmaceuticals, cosmetic products, finished textile products, environmentally friendly building materials, chemical products and glass production, etc. For your reference, a Vietnamese case of FDI attraction for Samsung Electronics is presented in [Box 1].

In fact, the government of Uzbekistan has made considerable efforts to attract anchor companies into the Navoi FIEZ since its establishment. It continuously hosted promotional events domestically and abroad, and held various informal meetings with leading MNEs, especially through diplomatic channels. Unfortunately, however, the outcomes have so far proved unsatisfactory. Compared with the Vietnamese case, a key pitfall of the Navoi FIEZ to attract major MNEs largely stems from the ambiguity of its policy orientation and establishment concept. The government of Vietnam has firmly maintained its FDI-induced export promotion as one of its key policy priorities for the country, and the policy direction of special economic zones in Vietnam is clearly in line with the overall policy stance. Such policy consistency has contributed to substantially reduce investment risks for foreign investors and created a more favorable investment climate within the country. It should be admitted that domestic value-additions from FDI had been not conspicuous at the early stages but, as presented in [Box 1], the localization of the production process has been impressively improved later on.

In conclusion, between the aforementioned two scenarios, we strongly believe that the second option is much more effective to improve FDI inflows into the Navoi FIEZ. Moreover, radical policy efforts are needed in order to transform the Navoi FIEZ into a key export platform in Uzbekistan. As Radelet (1999) convincingly demonstrates, historically no country could ever rapidly expand manufacturing exports without platforms such as special economic zones. Accordingly, the production concept of the Navoi FIEZ should definitely be re-arranged in this direction.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 071 [Box 1] Success of Vietnamese FDI

Until the mid-2000s, Korea's direct investment to Vietnam had concentrated on labor- intensive industries such as clothing and footwear. However, after the second half of 2000s, the focus shifts toward capital and high-tech intensive industries. For example, Samsung Electronics Co. Ltd chose Vietnam as a strategic smartphone production base, and has massively expanded its investment into Vietnam since 2009. To date, Samsung Electronics has invested a total of 9.5 billion USD, which is the largest size of foreign investment in Vietnam. In March this year, the Vietnamese government also approved a $300-million research and development project in Hanoi by Samsung Electronics.

< Korea’s ODI patterns to Vietnam(1990~2015) >

3,000 Investment on Global Investment on Capital-intensive Financial Technology- 2,500 industry Crisis intensive industry

2,000

1,500 Bilateral East Asian Investment 1,000 Diplomatic Currency on Labor- (Unit: Milion USD) relations Crisis intensive industry 500

0 ’92 ’93 ’94 ’95 ’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15

Accepted Amount Invested Amount Note: 2015 is based on data collected as of jan-Sep. Source: KIEP(2016).

To date, Vietnam has emerged as Samsung's biggest production hub, producing 40% of the total Samsung-brand smartphones in the world. Samsung Electronics employs 100 thousand local workers and accounts for 20% of the total Vietnamese exports. The expansion comes amid similar moves by electronics firms operating in Vietnam, such as LG, Microsoft, Intel, Canon and Toshiba, among many others.

Thanks to such massive investment made by Samsung, the share of electronic products among the Vietnamese exports drastically increased from 5% in 2010 to 23% in 2014, becoming the foremost exporting item of the Vietnamese economy. In 2015, Vietnam has emerged as the third largest export and overseas direct investment destination for Korean companies.

There are a number of factors for the massive FDI into Vietnam. First of all, the costs required for production and distribution, including wages and taxes, are relatively lower in Vietnam than other neighboring countries. Wage levels for the Vietnamese workers are about one-sixth that of China.

Second, market potential is another advantage of Vietnam as an FDI destination. It not only has easy access to Southeastern economies, but also a sizable domestic consumer market. In particular, a half of total population (90 million) are young (under 30), and have significant interest in purchasing smartphones. Third, geographical advantage and excellent distributive infrastructure are also contributing factors for FDI inflows.

072 • 2015/16 Knowledge Sharing Program with Uzbekistan Finally, the Vietnamese government offers quite aggressive incentive benefits to foreign investors. The preferential corporate tax rate of 10% applies to investment projects for special economic zones or for newly established FDI firms in the sectors of high-tech, scientific research and technological development. This is for 15 years from the first year of revenue generation and a maximum 30 years at the Prime Minster’s approval. On top of this, tax holidays are applied within four years of earning profits: 50% reduction within nine years afterwards. Value-added tax and excise tax are also exempt for special economic zones.

Samsung Electronics is making a variety of efforts to increase the localization of production. This is partly due to the fact that localization is needed to benefit from FTA preferential tariffs. Currently, the localization ratio of Samsung production in Vietnam is around 30-35%.

4.2.2. Easing Foreign Exchange Control

According to the Law on Currency Regulations, the national currency of UZS, are required not to be freely traded outside of Uzbekistan. In addition local companies operating in Uzbekistan confront restrictions in converting UZS into USD, especially when making payments to foreign suppliers (Deloitte; 2015).

In addition, 50% of foreign currency earned from exports should be exchanged for UZS through authorized banks at the official exchange rate. Exemptions to this requirement may be applied for some small companies or for FDI firms of foreign majority which export manufactured goods for not less than 60% of their total profit.

On the other hand, foreign investors are legally guaranteed transfer of funds in foreign currency in and out of Uzbekistan without limitation, on the condition that they have paid all taxes and other financial obligations in accordance with legislation. Practically, however, foreign firms in Uzbekistan often report that they experience difficulties obtaining sufficient foreign currency for operational purposes. Moreover, surprisingly, the Navoi FIEZ is not an exemption.

According to the current currency regulations, the currency conversion process should take no longer than two weeks, but in reality lag times range from three months to more than a year (U.S. Department of State; 2015). During delaying periods, contrary to existing legislation, the entire money is seized by the Central Bank of Uzbekistan in a non-interest bearing account.

At the same time, however, it should be understood that the real problem here is not any legal control on foreign exchange, but rather the insufficient volume

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 073 of foreign currencies under the control of the Central Bank for providing all enterprises and citizens of Uzbekistan. There is more demand in foreign currency at Central Bank rate than offered.

In any case, it is a fact that the difficulty in foreign exchange generally leads to impeding or even freezing sizable production activities within the Navoi FIEZ, making the import of intermediate goods and raw materials difficult or even impossible. Special treatment for Navoi FIEZ could significantly contribute towards further FDI attraction.

4.2.3. Adopting Preferential Treatment on Value-added Tax

In Uzbekistan, value-added tax is levied on the supply of goods and services as well as on the import of goods. The standard rate is now 20% of the gross revenue, which is relatively high compared to international standards.

Micro firms and small businesses are subject to simplified taxation regulations, replacing profit tax, VAT, property tax, land tax, social infrastructure development tax, and national road, school development and pension fund contributions. Those firms are, in fact, not payers of VAT, although they can opt to register and pay VAT on a voluntary basis. Furthermore, they report and pay VAT quarterly before the 25th day of the month following the reporting period. Other legal entities report on a monthly basis and pay VAT on a monthly basis before the 25th day of the month following the reporting period.

Small businesses in Uzbekistan are defined by the number of employees, including individual entrepreneurs and micro and small enterprises. The threshold number of employees varies by sector. There is no legal definition for medium- sized enterprises. The average number of employees in a micro enterprise should not exceed 20 in manufacturing and 10 in services. A small enterprise has up to 100 employees in manufacturing and up to 25 in services.

As seen in [Figure 1-4], the employment size of resident firms operating in the Navoi FIEZ is, without exception, less than 100. It is doubtful that it is a simple coincidence that they are all small businesses or micro firms. It is highly plausible that they are hesitant in expanding their investments - and thus employment beyond 100 employees - due to the potential VAT burden. Consequently, adopting a preferential treatment provision of VAT for all entities in Navoi FIEZ would be a key contributing factor to substantially increasing investment and in vitalizing production activities within the zone.

074 • 2015/16 Knowledge Sharing Program with Uzbekistan 4.2.4. Enhancing Investment Promotion Activities

As UNDP &IFMR(2015) argue, under the current regulations, no function is assigned to the Zone Directorate for the independent search and FDI attraction of investors. Consequently, the Directorate of the Navoi FIEZ only engage in conducting operational management activities of the zone. “Uzinfoinvest” under the auspices of MFERIT, is wholly responsible for promotional activities.

The experience of SEZs in Korea suggests that, for the successful development of SEZs, their great significance has a presence in the management of the zones of relative independence regarding the search and attraction of investors, along with the creation of additional conditions for their attraction. While “Invest Korea” is responsible for FDI promotional functions for all foreign investments in Korea, directorates of free economic zones (FEZs hereafter) and local governments are also actively involved in promotional activities. For example, the directorate of Incheon FEZ in Korea has four headquarters (i.e. divisions) and one of them is “Business Opportunity Headquarter” that pursues various promotional activities at the local level.

4.2.5. Improving Legal Framework for Export Promotion

A sound and consistent legal framework is an important prerequisite for policy implementations. [Figure 1-19] illustrates a basic legal structure of foreign economic policy of Uzbekistan. As for foreign trade areas, the basic legislation in Uzbekistan is “Law on Foreign Economic Activity.” In addition, other legal provisions include the “Law on Export Control”, the “Law on Safeguard measures, anti-dumping and countervailing duties”, and a number of Presidential decrees and Ministerial resolutions.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 075 [Figure 1-19] Uzbekistan’s Legal Framework for Foreign Economic Policy

Law on Currency · Law on Foreign Investment (1998) Law on Foreign Regulation · Law on guarantees and measures of Economic Activity protection of foreign investors' rights (1998) Customs Code (1997)

· Lawon Export Control · Lawon Free Economic Zones · Lawon safeguard measures, anti-dumping · Lawon Investment Activity and countervailing duties (2003) · President's decree on additional measures to · President' Decree on additional measures to stimulate direct foreign investment stimulate exports of goods(1997) · Resolution (Cabinet of Ministers) on improvement of regulation of import and export in substances, which destroy ozone layer (2005) · Resolution (Cabinet of Ministers) on additional measures of liberalization of foreign trade activities (1998)

presents the structure of Uzbekistan’s Law on Foreign Activity. According to Article 6 of this law, the objects of foreign economic activity include “the goods, works (services), any property, including securities, currency values, electric, thermal and other types of energy, vehicles, the objects of intellectual property being objects of purchase and sale or the exchange, except for those prohibited by the legislation to use in foreign economic activity.” Therefore, the coverage of this law is quite broad, beyond foreign trade matters.

In addition, while foreign trade laws usually contain provisions for export promotion activities, Uzbekistan’s Law on Foreign Activity does not contain those provisions. For example, “Foreign Trade Act” of Korea, which is an equivalent legislation of Uzbekistan’s Law on Foreign Activity, explicitly contains a provision to support export promotional activities. Specifically, Article 4(2) (Measure for Promotion of Trade) of Foreign Trade Act stipulates that:

The Minister of Trade, Industry and Energy may give necessary support to a person who falls under any of the following subparagraphs:

• A person who engages in a business of advisory services, guidance services, overseas advertising, exhibitions, training, arranging business talks, etc. for promoting trade; • A person who has established and run a facility related to trade, including a trade exhibition center and a trade training center; • A person who has established and run a platform for the scientific processing of the business affairs relating to trade.

076 • 2015/16 Knowledge Sharing Program with Uzbekistan

Structure of Uzbekistan’s Law on Foreign Activity

Article Title Article Title

1 Main objectives of this Law 17 State regulation of foreign trade activities

Authorities of the Cabinet of Ministers on 2 Legislation on foreign economic activity 18 the regulation of foreign economic activity

Authorized state body in the field of 3 Foreign economic activity (Definition, etc.) 19 regulation of foreign economic activity

Basic principles of foreign economic Prohibitions and restrictions on export and 4 20 activity import

Licensing and quotas for export and 5 Subjects of foreign economic activity 21 import of certain types of goods

6 Objects of foreign economic activity 22 Export controls

Protecting the economic interests of Rights of subjects of foreign economic 7 23 the Republic of Uzbekistan of foreign activity economic activity

Obligations of subjects of foreign 8 24 Protective measures economic activity

9 Main directions of foreign trade activities 25 Anti-dumping duties

International economic and financial 10 26 countervailing duties cooperation

Technical, pharmacological, sanitary, veterinary, phytosanitary 11 Foreign trade activity 27 and environmental standards and requirements for imported goods

12 Attraction of foreign investments 28 Free economic zones

Investment activity outside the Rep. of 13 29 Free trade Uzbekistan

Representative offices of foreign states 14 and their legal persons in the territory of 30 Dispute Resolution Uzbekistan

Guarantees of the rights and interests of Responsibility for violation of legislation on 15 31 foreign economic activity foreign economic activity

16 Access to the information

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 077 In the case of Korea, there exist several other legal provisions targeting export promotion, such as Korea Trade-investment Promotion Agency Act, Trade Infrastructure Development Act, and Electronic Trade Facilitation Act.

In conclusion, it is highly recommended that a more unified and specialized trade law be prepared, one which explicitly stipulates promotional activities of exports. It could be a good starting point to not only revitalize exports in the Navoi FIEZ, but also for the rest of the economy. In addition, as a final remark, we would like to offer a reminder that proper implementation of legal provisions is even more important than their enactments. Consistency and lack of bias in policy implementation are particularly imperative to reduce uncertainties faced by exporters and thus induce them to continue their investments in exporting activities.

[Figure 1-20] Korea’s Legal Framework for Foreign Economic Policy

Foreign Exchange Transactions Act Foreign Trade Act Foreign Investment Promotion Act Customs Act

· Korea Trade-investment Promotion Agency · Act on designation and Management of Free Act Trade Zones · Trade Insurance Act · Act on designation and Management of Free · Act on the Investigation of Unfair Trade Economic Zones Practices and Remedy against Injury to · Foreigner's land acquisition Act Industry · Trade Infrastructure Development Act · Act on Trade adjustment Assistance following the Free Trade Agreement · Electronic Trade Facilitation Act

078 • 2015/16 Knowledge Sharing Program with Uzbekistan References

Decree of the President of the Republic of Uzbekistan, On the establishment of free industrial-economic zone in Navoi region #UP-4059 dated December 12, 2008. Collection of the legislation of the Republic of Uzbekistan, 2008, #49. Directorate of the Navoi FIEZ, Information on implemented and implementing investment projects, production and export volume in the Navoi FIEZ. Ministry of foreign economic relation, investments and Trade of Republic of Uzbekistan (MFERIT) & United Nations Development Program in Uzbekistan (UNDP), (2013), Invest in Uzbekistan, Retrieved from http://www.undp.uz/en/publications/ publication.php?id=331 Law of the Republic of Uzbekistan, “On free economic zones”, #220-I, April 25, 1996. Ogai, D. (2009), The free economic zone - territory of free trade. (Online published) Uzbekistan National News Agency. Retrieved October 15, 2009, from http://uza.uz/ en/business/990/ Oh, W.S, Export Processing Zones in the Republic of Korea: Economic Impact and Social Issues. Working Paper No.75.International Labor Organization, 1993. Rondinelli, D.A &CheemaG.Sh, Reinventing Government for the twenty-first century: State capacity in globalizing society. Connecticut State: Kumarian Press, Inc, 2003 State Committee of Statistics of Republic of Uzbekistan,The basic results of social and economic development [Yearly statistics], Retrieved from http://stat.uz/en/reports/ Stefanovich, S, (2008), Analytical Framework of FDI Determinants: Implementation of the OLI model. Economics and Organization, 5 (3); 239 – 249. Retrieved March 25, 2012, from http://facta.junis.ni.ac.rs/eao200803/eao200803-07.pdf United Nations Development Program in Uzbekistan (UNDP), (2008), Establishment of special economic zones in Republic of Uzbekistan (in Russian).Analytical Report. Retrieved November 28, 2008, from http://www.undp.uz/ru/publications/ publication.php?id=152 United Nations ESCAP (UNESCAP), Free Trade Zone and Port Hinterland Development, 2005. Valiev, B.B,(2014). Foreign Direct Investment Policy and Trends in Uzbekistan.Retrieved from http://sociosphera.com/files/conference/2014/Paradigmata_poznani_1-14/93- 97_b_b_valiev.pdf World Bank Institute (WBI) (2008), Trade Facilitation for Export Diversification in Small or Medium South Asian Countries: E-Learning Course, 2008.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 079 Appendix

Appendix: Navoi FIEZ Survey

This survey is part of 2015/16 Korea-Uzbekistan KSP (Knowledge Sharing Program) that is jointly carried out by Korea and Uzbekistan governments. The purpose of this survey is to understand the current status of Navoi Free Industrial Economic Zone (FIEZ). The contents and results of the survey will ONLY be used as a basis for improvement in policy for revitalizing the Navoi FIEZ and will NOT be used for any other purposes. As this survey is intended for important policy decision-making of the Uzbekistan government, we sincerely appreciate your valuable time to in responding and providing opinions.

[Box 1] Keep the following guidelines in mind

The following questionnaire is designed to be responded to by a CEO or a manager who fully understands the company’s overall status such as human resources, technology, financial situation, etc. Please respond to ALL questions in the survey starting from the first page. Please select ONLY ONE response from the examples provided unless instructed otherwise. When responding to the questions, please answer according to the explanations provided before each question. There may be some cases where they requires no answer depending on the previously answered questions. Although some questions require you to write down information related to your business management, it is highly appreciated if you could write down as much detail as possible.

080 • 2015/16 Knowledge Sharing Program with Uzbekistan Corporate Activities

※ The following questions are related to the corporate activities.

Q1. Which types of business activities are your company currently engaged in?

① (Assemble-Simple Processing) Simple Processing of a product, Package, Assemble ② (Manufacture-Production) Manufacture-Production by processing raw materials ③ (Distribution-Logistics) Distribution-logistics of finished products ④ Other (______)

Q2. Who are the main customers of your company’s final products?

① Foreign-invested companies within domestic market ② Other enterprises within domestic market ③ Overseas (Name of Country: ______)

Q3. What means of transport do you mainly use in order to supply to the market?

① Road Transport ☞ Go to Q4 ② Rail Transport ☞ Go to Q4 ③ Air Transport ☞ Go to Q5 ④ Other (______) ☞ Go to Q4

Q4. What is the biggest reason for the low usage of air transportation when supplying your company products?

① Products are prohibited items for air transportation ② Products are not prohibited but they are not suitable for air transportation ③ Products are suitable for air transportation but the costs are high ④ Other (______)

Q5. Where does your company procure raw materials (for production) from?

① Foreign-invested companies within domestic market ② Other enterprises within domestic market ③ Overseas (Name of a Country: ______)

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 081 Appendix

Q6. What means of transportation does your company mainly use to transfer raw materials?

① Road Transport ② Rail Transport ③ Air Transport ④ Other (______)

Investment Decision

Q7. What is your company’s priority consideration when deciding to move in to the Navoi FIEZ?

① Good access to the major customer enterprises and the market ② Good support scheme including tax relief, financial support etc. ③ Reasonable level of rent fee ④ Excellent infrastructure condition in terms of logistics・transportation etc. ⑤ Local connection (business owners etc.) ⑥ Integration and seamless linkage with associated companies ⑦ Easy supply and demand of the technology and production workers ⑧ Promotion of employee welfare and commuting convenience ⑨ Convenient administrative procedures and deregulation ⑩ Other (______)

Q8. If Navoi FIEZ was not established, which investment option would your company choose from the following?

① Abandonment of new investment/new business ② Investment in other regions besides Uzbekistan ③ Investment in overseas ④ Other (______)

Q9. When your company decided to move into Navoi FIEZ, in form of business was it?

① New start-up ② New or additional factory・plant ③ Relocation of the existing factory・plant (the same scale) ④ Relocation of the existing factory・plant (expansion of the business size) ⑤ Other (______)

082 • 2015/16 Knowledge Sharing Program with Uzbekistan Q10. Have your company’s foreign investors ever run a factory or a plant in Uzbekistan before becoming Navoi FIEZ tenant?

① Yes (Name of region: ______) ② No

Q11. Of the following types, who are your company’s domestic investors?

① Private enterprise ② Public Enterprise/State-owned Enterprise ③ Other (______)

Yes No Unknown

1. The company’s business has no relationship with the 1 2 3 parent company.

2. The company produces/sells one level lower quality 1 2 3 products.

3. The company produces/sells the same products of the 1 2 3 parent company.

4. The company sells the parent company’s products that 1 2 3 have been imported.

5. The company only sells within the domestic market. 1 2 3

6. The company sells to the parent company or foreign 1 2 3 affiliates.

7. The company receives technology provided by the 1 2 3 parent company.

8. The company imports raw materials from the parent 1 2 3 company.

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 083 Appendix

Q12. This question is to understand the relationship between your company and foreign investors. Please circle either ‘yes’ or ‘no’ if applicable. For other, circle ‘unknown’.

Very Very Category Good Similar Poor good poor

Support schemes including tax exemption, 1 2 3 4 5 customs etc.

Rent charges 1 2 3 4 5

Convenient infrastructure 1 2 3 4 5

Easy access to major customers and the 1 2 3 4 5 market

Proximity of parts/materials suppliers 1 2 3 4 5

Seamless linkage with the associated 1 2 3 4 5 companies

Easy supply of the technical/skilled workers 1 2 3 4 5

Easy supply of the production workers 1 2 3 4 5

Good living and settlement conditions 1 2 3 4 5

Q13. How do you rate the following conditions of your company within Navoi FIEZ in relation to other regions in Uzbekistan?

Q14. How would you rate your company product in terms of international competitiveness?

① Both price and quality are competitive ② Price is competitive but the quality is weak ③ Quality is competitive but the price is expensive ④ Both price and quality are vulnerable

084 • 2015/16 Knowledge Sharing Program with Uzbekistan Government Policy Evaluation

※ The following are questions for the Government Support System for the FIEZ

Q15. Please rank the following government support policies for Navoi FIEZ in order of benefits delivered to your company from: (1) the most beneficial to (6) the least beneficial.

① Various tax incentives (Local tax, Corporate Income tax etc.) ② Rent reductions ③ Customs and tariff benefits ④ Simplifying administrative procedures and providing one-stop service ⑤ Financing and financial assistance (Grants, preferential loans etc.) ⑥ Others (______)

Q16. How would you rate the government support for Navoi FIEZ compared to the Angren or Djizak’s SIZ (Special Industrial Zone)?

Very Very Category Good Similar Poor good poor

Various tax incentives 1 2 3 4 5

Customs procedures 1 2 3 4 5

Convenient currency exchange 1 2 3 4 5

Infrastructure 1 2 3 4 5

Accessibility for transportation 1 2 3 4 5

Rent Fee 1 2 3 4 5

Simplicity of administrative procedures 1 2 3 4 5

Transparency in administration 1 2 3 4 5

Various deregulation policies 1 2 3 4 5

Q17. In your opinion, which of the following economic zones is the most attractive?

① ② ③

Navoi FIEZ Angren SIZ Djizak SIZ

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 085 Appendix

Q17-1 Why?

Q18. In your opinion, which of the following economic zones is the least attractive?

① ② ③

Navoi FIEZ Angren SIZ Djizak SIZ

Q18-1 Why?

Q19. How would you rate the government’s support policies for Navoi FIEZ compared to other special economic zones located in other Central Asian countries?

Very Very Category Good Similar Poor good poor

Various tax incentives 1 2 3 4 5

Customs procedures 1 2 3 4 5

Convenient currency exchange 1 2 3 4 5

Infrastructure 1 2 3 4 5

Accessibility for transportation 1 2 3 4 5

Rent Fee 1 2 3 4 5

Simplicity of administrative procedures 1 2 3 4 5

Transparency in administration 1 2 3 4 5

Various deregulation policies 1 2 3 4 5

Q20. Where do you mostly visit when difficulties occur in your sales process or production activities?

① Competent ministries within central government ② Competent departments within local government ③ Navoi FIEZ Administration ④ Others (______) ⑤ No visit experience.

086 • 2015/16 Knowledge Sharing Program with Uzbekistan Q21. Please rate your level of satisfaction with the below types of government administration related with the Navoi FIEZ.

Very not not very Category Satisfied Average Satisfied Satisfied Satisfied

Competent Ministries within 1 2 3 4 5 Central Government

Competent Departments 1 2 3 4 5 within Local Government

Navoi FIEZ Administration 1 2 3 4 5

Q22. Despite the continuous effort put in by the government to revitalize foreign investments in Navoi FIEZ, the actual level of foreign investment in Navoi FIEZ considering the size of budget utilized is relatively low. What do you think can be attributed to foreign direct investment in Navoi FIEZ?

① Temporarily low investments due to the global economic crisis ② New Special Industrial Zone such as Angren, Djizak ③ Lack of incentives’ difference compared with other areas ④ Geographical characteristics of the market and the Navoi FIEZ distant from the major markets ⑤ Excessive regulations on money transfer and customs etc. ⑥ Poor living and settlement conditions ⑦ Lack of government support schemes compared to surrounding countries ⑧ Administrative opacity and excessive regulation compared to surrounding countries ⑨ Others (______)

Q23. What is the most urgent change needed to revitalize foreign investment in Navoi FIEZ?

① Establishing differentiated tax incentives compared to other areas ② Improving customs benefits and procedures ③ Expanding foreign exchange management and foreign remittances special measures ④ Expanding tax incentives through lowering minimum required investments ⑤ Attracting more leading foreign companies to operate in Navoi FIEZ ⑥ Expanding advertising efforts to attract more foreign investors ⑦ Improving conditions for living and settlement ⑧ Others (______)

Chapter 1 _Improving Investment Climates and Export Performance in the Navoi FIEZ • 087 Appendix

※ Please respond to the following as of 2015.

1. Company Name

Domestic: 2. Number of Full-time Employees (Including Executives) Foreign:

3. Established Year

4. Year of Business Launch in Current Location

① 100% Foreign Investments ② Joint venture 5. Ownership Structure (Domestic %: Foreign %) ③ 100% Domestic investments

6. Main Products

7. Annual Sales Approx. (USD)

① No exports 8. Total exports ② Less than 10% (Proportion of annual sales) ③ 10% - 50% ④ More than 50%

① No imports 9. Total imports ② Less than 10% (Proportion of total raw or Subsidiary Materials) ③ 10% - 50% ④ More than 50%

088 • 2015/16 Knowledge Sharing Program with Uzbekistan 2015/16 Knowledge Sharing Program with Uzbekistan: Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Special Economic Zone, Industrial Development, Chapter 2 Public Budgeting and Postgraduate Education

Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure Effectiveness in the Republic of Uzbekistan

1. Introduction 2. Budget Process of Korea: Concepts and Framework 3. Analyses of Uzbekistan Cases 4. Healthcare in the Republic of Uzbekistan 5. Policy Suggestions and Conclusions ■ Chapter 02

Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure Effectiveness in the Republic of Uzbekistan

Changik Jo (Hallym University) Hoon Heo (Korea Development Institute) Otabek R. Fazilkarimov (Ministry of Finance) Saidjon Kodirov (Ministry of Finance)

Summary

Since the mid-1990s, the Republic of Uzbekistan has undergone a series of healthcare reforms to highlight the reconstruction of primary care and establish an emergency care network. In collaboration with international organizations such as World Bank, policies have been gradually implemented on the structure and budget allocation to hospitals, which eventually resulted in reduced hospital capacity. More recently, there have been increases in out-of-pocket payments for hospital and other health services that currently became an entry barrier to healthcare services and pharmaceuticals for some patient groups. Though the Republic of Uzbekistan has tried to expand the coverage of and accessibility to healthcare services, it has incurred high healthcare expenditures that account for more than 16% of the national budget so that an effort to design strategic plans to improve the healthcare field’s budget process and budget expenditure effectiveness is highly requested.

It is well known that the main objective of the budget process’s legal and methodological support is to create conditions for obtaining the maximum amount of public goods with limited financial resources consolidated in the budget. Additionally, improving the budget process should further ensure effective and efficient budget spending by transitioning to better budget models.

090 • 2015/16 Knowledge Sharing Program with Uzbekistan In Uzbekistan, healthcare financing is carried out according to the traditional budget model among the other two—entrepreneurial and insurance—models. At the same time, it is well known that most of the developed countries with knowledge-based economies have been renovating their budget process systems based on state-of-the-art evaluation schemes that examine the evidence and performance of the corresponding government or public projects.

In this vein, after reviewing the successful experience of the Republic of Korea, the objective of this study is to develop effective strategy measures to improve the budget process and eventually increase the efficiency of the budget expenditures in the Republic of Uzbekistan’s healthcare field. Specifically, the main objectives of the project are as follows: • Establish a strategic partnership with the Republic of Korea to improve the public finance system as well as the knowledge sharing activities in the legislative framework regulating the budget process. • Verify and analyze the healthcare system’s financial management and budgeting methods of the Ministry of Strategy and Finance (MOSF), Republic of Korea. • Develop evidence-based proposals for improving the Republic of Uzbekistan’s national healthcare budget model. • Develop a strategy to improve the budget process and budget expenditure effectiveness in the Republic of Uzbekistan’s healthcare field.

Since 1991, when the Republic of Uzbekistan gained its independence after being part of the Soviet Union for more than seven decades, the Uzbekistan government has struggled to remodel the pre-existing healthcare system termed the “high-cost Semashko system.” The Soviet Semashko healthcare system emphasized hospital capacities and neglected primary healthcare even though it provided all citizens with access to “free” health services. The two main weaknesses of the system were the substantial emphasis on quantitative indicators rather than health outcomes or quality of healthcare, and healthcare financing that was biased to secondary healthcare.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 091 Effectiveness in the Republic of Uzbekistan capacity building. The healthcare reform known as “Health 3” is currently implemented to strengthen secondary and tertiary care by adopting a new budget process and management method separately for general and special healthcare. Despite the ground-breaking series of healthcare reforms and successful outcomes, Uzbekistan’s healthcare system has been quite costly and relatively inefficient so that a new model is necessary for the budget process for efficient and effective healthcare financing along with a much-needed reform agenda that includes 1) transformation of primary care, 2) creation of an integrated system of emergency medical care, 3) manpower training, 4) improvement of paid medical services, 5) enhanced financial mechanism, and 6) formation of high-tech specialized medical care.

To this end, this project, in collaboration with two local consultants from the Ministry of Finance of the Republic of Uzbekistan, is conducted to design and provide the feasible policy solutions that are expected to resolve the issues mentioned above. The chapter consists of four sections. Section 2 discusses the budget process Korea uses, Sec. 3 gives with an in-depth analysis of the cases in Uzbekistan, and Sec. 4 suggests new policies to improve the budget process and effectiveness in the healthcare field.

In 1997, the Republic of Korea adopted its budget management methods when the financial crisis hit the Asian countries including Korea, Thailand, and Indonesia. Accordingly, the Korean government initiated bold and decisive structural reforms in its budget system to resolve the root causes of the crisis and invigorate the economy. The major focus of the budgetary reforms was the adoption of a series of initiatives for strengthening the budget management such as installing a performance-oriented approach in the system, implying public expenditure management based on the value for money. The MOSF played a vital role in improving the appraisal and evaluation system by introducing the total project cost management (TPCM) system, and medium-term expenditure framework (MTEF) in 2004. In addition, the fiscal authority conducts the preliminary feasibility studies (PFSs) prior to budgeting for large-scale projects that cost more than 50 billion won to verify their feasibility.1) Introduced in 1997, the PFS aims to improve the fiscal management efficiency and prevent budgetary waste. Also, TPCM aims to improve the efficiency of fiscal spending through reasonable adjustment and total project cost management of large-scale projects funded by the national treasury in each stage of the project. Resulting from a lack of understanding of the detailed content of projects and fraud, waste and misuse were hardly noticed. Moreover, there was no performance evaluation, and the budget was regarded as a blueprint merely for the central budget agency. To fix

1) Rajaram et al. The Power of Public Investment Management: Transforming Resources into Assets for Growth. World Bank, 2014.

092 • 2015/16 Knowledge Sharing Program with Uzbekistan the shortcomings, a performance management system (PMS) was adopted in 2004 with three components: the performance goal management system (PGMS), the fiscal program assessment system (FPAS), and the in-depth analysis system (IAS).

Korea uses all three of these budget management systems in the healthcare field. In particular, given the size of the aging population in addition to the lowest fertility rate among 34 OECD member countries, successful budget management in the healthcare and welfare fields is considered an influential factor that can reduce the waste of money and eventually improve the effectiveness of related policy implementation.

1. Introduction

The main objective of the budget process’s legal and methodological support is to create the conditions to obtain the maximum amount of public goods with limited financial resources consolidated in the budget. Improving the budgetary process should further ensure the effective and efficient budget spending by transitioning to better budget models.

In Uzbekistan, healthcare financing is carried out according to the traditional budget model among the other two—entrepreneurial and insurance—models. At the same time, it is well known that most of the developed countries with knowledge-based economies have been renovating their budget process systems based on methods through state-of-the-art evaluation schemes that examine evidence and performance of the corresponding government or public projects.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 093 Effectiveness in the Republic of Uzbekistan Since 1991, when the Republic of Uzbekistan gained its independence after being part of the Soviet Union for more than seven decades, the Uzbekistan government has struggled to remodel the pre-existing healthcare system termed the “high-cost Semashko system.” The Soviet Semashko healthcare system emphasized hospital capacities and neglected primary healthcare even though it provided all citizens with access to “free” health services. The two main weaknesses of the system were the substantial emphasis on quantitative indicators rather than health outcomes or quality of healthcare, and healthcare financing that was biased to secondary healthcare.

The first healthcare initiative or reform (1998–2005), aka “Health 1,” focused on strengthening and improving the accessibility to primary healthcare services by providing over 3,200 health centers along with training of GPs and nurses. With significant joint support from World Bank and the Uzbekistan government, Health 1 piloted new mechanisms and frameworks for the delivery, financing, and management of primary care in three oblasts and another two later. The second healthcare reform called “Health 2” in collaboration of World Bank and Asian Development Bank was initiated to reinforce and focus on the primary care system by providing equipment and capacity building. The healthcare reform known as “Health 3” is currently implemented to strengthen secondary and tertiary care by adopting a new budget process and management method separately for general and special healthcare. Despite the ground-breaking series of healthcare reforms and successful outcomes, Uzbekistan’s healthcare system has been quite costly and relatively inefficient so that a new budget process model for efficient and effective healthcare financing is necessary along with a much-needed reform agenda including 1) transformation of primary care, 2) creation of an integrated system of emergency medical care, 3) manpower training, 4) improvement of paid medical services, 5) enhanced financial mechanism, and 6) formation of high-tech specialized medical care.

To this end, in collaboration with two local consultants from the Ministry of Finance of the Republic of Uzbekistan, this project is conducted to design and provide the feasible policy solutions that are expected to resolve the issues mentioned above. The chapter consists of four sections. Section 2 discusses the budget process Korea uses, Sec. 3 gives an in-depth analysis of the cases in Uzbekistan, and Sec. 4 suggests new policies to improve the budget process and effectiveness in the healthcare field.

094 • 2015/16 Knowledge Sharing Program with Uzbekistan 2. Budget Process of Korea: Concepts and Framework

Korea achieved exceptionally high and rapid economic growth and industrialization during the past half century transforming itself from a developing to a developed country. Accordingly, vast literature has analyzed the mechanisms of and discussed the key factors attributed to the “Korean Miracle.” The success factors that have been revealed so far include the Korean government’s 1) future-oriented, long-term development strategies and policies, 2) abundant, well-educated, and well-disciplined labor force, and 3) technological innovations, all of which were harmoniously placed to create the unique Korean growth model (Amsden, 1989; Onis, 1991; Wade, 1990; Chung, 2011).2) Of these success factors, this chapter focuses on the role of the Korean government’s long- term and future-oriented development strategies and policies, particularly in regard to how scarce national resources were allocated during these times and its evolutionary paths.

We begin by conceptualizing government budgeting by presenting its definition, functions, and principles. The second section outlines the current framework and characteristics of the Korean budget process by incorporating the theoretical and historical backgrounds of Korea’s budget system. The third section describes the country's budgeting processes: budget formation, execution, and audit. Finally, we provide a brief overview of the budget management methods stemming from the latest budget reform initiatives, such as the implementation of performance-oriented budgeting, top-down budgeting, the National Fiscal Management Plan (NFMP), PMS, the fiscal project self-assessment, program budgeting, and so forth.

2.1. Conceptualization of Government Budgeting

2.1.1. Definition of Budgeting

Budgeting is a common societal phenomenon; in the same way that everybody makes decisions on how to allocate their time, income, and any other resources, societies decide how to allocate public resources between competing uses. In this chapter, we adopt a broad definition of government budgeting as "a numerical expression of government activities, which reflects political, economic, and administrative decision making in a country."

2) Chung. Innovation, Competitiveness, and Growth: Korean Experiences. 2011.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 095 Effectiveness in the Republic of Uzbekistan 2.1.2. Functions and Principles of Budgeting

2.1.2.1. Functions

Schick (1966) pointed out that budgets have functions as financial control, managerial improvements, and planning. Thirty years later, Rubin (1996) emphasized prioritization and accountability by taking into consideration the dominant trend in budgeting during the 1970s and 1980s.3) • Planning involves determination of objectives, appraisal of alternatives, and programs selection; thus, it is closely linked to budget preparation. • Managerial improvements involve programming of approved goals into projects and activities, designing units, and allocating necessary resources. • Financial control refers to “the process of binding officials to the policies and plans set by their superiors”4) through the appropriation and budget execution process, and through control procedures; thus, it is predominant during the execution and audit stage s. • Prioritization involves the process of making arrangements in the budget according to relative importance.5) • Accountability involves improving the accountability of the budget to the public in order to restore the capacity to govern.

3) Rubin. Budgeting for Accountability: Municipal Budgeting for the 1990s. 1996. 4) Schick. Planning-Programming-Budgeting System: A Symposium. 1996. 5) Mitchell and Thurmaier. Currents and Undercurrents in Budgeting Theory: Exploring the Swirls and Heading Upstream. 2010.

096 • 2015/16 Knowledge Sharing Program with Uzbekistan 2.1.2.2. Principles6)

Principles of Budgetary Governance

Traditional budgeting principles Modern budgeting principles

1. Public budgeting must be conducted openly 1. Budgets should be managed within clear, (transparency). sound, and predictable limits for fiscal policy 2. The information enclosed should be (clarity). comprehendible (clarity). 2. Budgets should be closely linked with the 3. The budget should comprise all expenditures, government’s medium-term strategic priorities revenues, and debts for the activities carried out (farsightedness). by a government (comprehensiveness). 3. A cost-effective budget framework should be 4. Government funds must flow through one designed in line with national development channel while keeping reserved and special needs in a coherent manner. funds to a minimum (unity). 4. Budget documents and data should be 5. Legislative appropriations should be specific publicly open, accessible, and transparent (specification). (transparency). 6. Expenditure authorization should be made prior 5. Budgetary choices should be debated in an to budget implementation (prior authorization). inclusive, participative, and realistic manner 7. Government spending should be confined to a (participatory). specified period of time (periodicity). 6. Budgets should be comprehensive, accurate, 8. Estimates for revenues, expenditures, and debts and reliable (comprehensiveness). should be accurate (accuracy). 7. Plans, management, and monitoring of budget execution should be actively conducted (activeness). 8. Performance, evaluation, and value for money should be integral to the budget process (performance oriented). 9.A budget should be sustainable in the long run. and fiscal risks should be well identified, assessed, and managed carefully (sustainability). 10. A quality assurance system including independent audits should promote the reliability and quality of budgetary implementation, fiscal plans, and budgetary forecasts (quality assurance).

Source: OECD (2014).

Budgeting practices vary widely across countries with respect to their traditional, institutional, and cultural factors, how it has evolved over time under varying circumstances and external variables, and the timing of when these principles are captured. Somewhat similar to the traditional principles with some additions such as farsightedness, monitoring and evaluation of the budget process, the OECD (2014) outlines the good practices of budgeting that reflect, in particular, the lessons from the recent economic crisis and intends to yield practical guidance in designing,

6) OECD. Principles of Budgetary Governance. 2014.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 097 Effectiveness in the Republic of Uzbekistan implementing, and improving budget systems to prepare for future challenges. These common elements of the budgeting practices among the developed countries provide a reference tool for policymakers and practitioners and have implications for possible future reforms.

2.2. Legal Framework of Korea’s Budget Process

Government budgeting in Korea originated with the first Constitution in 1948, which mandated that “the Executives shall, at the beginning of each regular session, submit to the National Assembly a budget including all the revenues and expenditures for a fiscal year.”7) As such, the constitutional right to budget formation is still given to the line ministries, while the right to budget deliberation and authorization is given to the National Assembly. Since the articles and clauses in the first Constitution addressed the mere basics of the core budgeting practices, the Fiscal Act, which first defined the system and rules for government accounting, was introduced in 1951. Later, in 1962, the Budget Accounting Act (BAA) was introduced to include performance-oriented budgeting, accrual budgeting, and a double-entry bookkeeping system to realize efficient budget management. The BAA has been in effect for more than four decades until the National Finance Act (NFA) was enacted in 2006.

As of now, the Constitution still serves as the basis for the legal framework that details the fundamental budget rules and the key actors involved in the budget process. It governs other fundamental budget rules, such as provisional and supplemental budgets. Despite its relatively detailed provisions, the Constitution delegates the budgetary powers to lower laws, as shown in

below.

7) Yu. Legal Basis of the Budget in Korea. 2002.

098 • 2015/16 Knowledge Sharing Program with Uzbekistan

Major Budget Laws in Korea The Constitution The Constitution gives the rights to draft the national budget to the administration and the right to deliberate and approve to the National Assembly. Such division of rights provides grounds for a check-and- balance system between the executives and the National Assembly.

National Finance Act The National Finance Act provides guidelines for the management of the national budget, funds, settlement of accounts, and performance management with the aim to facilitate the framework for efficient, performance-oriented, and transparent public financial management and sound fiscal operations.

Local Finance Act The Local Finance Act prescribes the basic principles for the financing and accounting of local governments in order to guarantee the autonomous and sound and transparent operation of local governments.

National Assembly Act The National Assembly Act specifies its organizational structure, agenda, and others for promoting democratic and efficient operation of the National Assembly as a representative body of its people. This act governs the Special Committee on Budget and Accounts, other budget groups, settlement processes, and the deliberation process.

Other Budgetary Legislation Additional legislation related to budgeting includes 1) Act on Management of Subsidies, 2) Tax Act, 3) Framework Act on Management of Charges, 4) Act on Public-Private Partnership in Infrastructure, and other related laws.

Source: The Ministry of Strategy and Finance (2014).

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 099 Effectiveness in the Republic of Uzbekistan 2.3. Budget Process in Korea: Formation and Execution

2.3.1. Fiscal Structure of the Central Government

[Figure 2-1] Fiscal Structure of the Central Government

National Economy

Public Sector Private Sector

General Govemment Public Corporation

Central Local Non-profit Public Non-financial Financial Public Government 355.8 Governments Organizations Public Entities Entities

General Account 209.16 in Account Special Accounts 49.2 in 18 Accounts Funds 105.0 in 64 Funds

Enterprise Special Accounts Budget-type Funds Expenditures 8.2 in 5 Accounts 105.5 in 54 Funds

Personner 26.9 Grain Mgmt 1.5 National Housing 18.0 General Expenses 2.2 Agencies for Government 0.8 Public Capital Management 11.9 Operation Costs 172.6 Government Procurement 0.1 Gov't Employee Pension 14.6 (Subsidies) (76.7) Postal Programs 3.3 National Pension 15.2 (Reserve Funds) (3.5) Postal Savings 2.6 Industrial Worker's Accident Compensation 4.7 Insurance and Prevention Other Special Accounts SME Start-up/Promotion 5.1 41.0 in 13 Accounts Military Pension 2.8 Agricultural Product Price Rural Structuring 6.6 Stabilization 2.5 Transportation Facilities 14.8 Registration 0.2 Prison Operation 0.04 Energy/Resources 2.8 Capital/Foreign Excange Stabilization Environmental Improvement 4.5 10.5 in 10 Funds Postal Insurance Regional Development 9.4 Deposit Insurance Fund 0.8 Relocation of US-FK 0.6 Bond Repayment Credit Construction of Multi-functional 0.7 Guarantee 2.8 Administrative City 0.7 Foreign Exg Stabilization 3.0 Relocation of Defense Trade Insurance 1.0 Military Facilities 0.2 Technical Credit Guarantee 1.3 Construction of Innovative City Miscellaneous 1.5 Construction Asia Culfural Hub 0.2

Source: The Ministry of Strategy and Finance (2014).

The Korean budget consists of the three categories: general accounts, special accounts, and funds. The general account expenditures are general government spending to serve its public function that includes national defense, diplomacy, education, housing, social infrastructure, social welfare, and healthcare. Special account expenditures are composed of special projects and financial operations that can be used only for the designated areas as determined by the respective acts. Funds are used flexibly on specified purposes that are independent from the budget. Funds also require approval from the National Assembly, but it is more

100 • 2015/16 Knowledge Sharing Program with Uzbekistan flexible in the execution and revision processes compared to the general and special accounts.

Timeline of Budget Process in Korea

Period Items Miscellaneous

End of Dec. Guidelines for the National Fiscal Management Plan

End of Jan. Submission of the Medium-Term Project Plan (line PFS for new projects that costs ministries → MOSF) more than 50 billion won

Feb. to Apr. Deliver expenditure ceilings for next year and Provide basic direction for guidelines for budget draft (MOSF → line ministries) budget drafting, define units, and set unit costs for major budget items

End of June. Check budget execution (MOSF) Draft and submit budget requests Submit budget draft

Discuss budget proposal by line ministries Receive feedback from July to Sept. respective ministries, mayor, and governor Report to president Hold budget advisory conference

Oct. 2 Submit the budget proposal to the National Assembly

Source: The Ministry of Strategy and Finance.

2.3.2. Budget Formation

2.3.2.1. Budget Formation: Executive Preparation

The executive budget proposal is the initial phase of the budget process, involving all administrative agencies. At the end of December, the MOSF provides guidelines for drafting the NFMP, the Korean version of MTEF, to the executives.

By January 31, the line ministries and agencies prepare and submit to the Budget Office (BO) of MOSF a Medium-Term Project Plan (MTPP) that includes expected expenditures for the coming year’s new and ongoing projects. Working in conjunction with the Office of Tax and Customs and the Bureau of Economic Policy (both in the MOSF), the Budget Office determines the revenue forecasts, assumptions of economic health for the coming year, and the possible necessity of bond issuance.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 101 Effectiveness in the Republic of Uzbekistan By April 30, the Fiscal Strategy Meeting attended by cabinet members and chaired by the president is held to finalize the expenditure ceilings by considering the revenues and expenditures estimates, mid-term financial planning, and national priorities. The BO sets the overall expenditure ceilings and sub-ceilings for each line ministry and agency along with the guidelines for budget draft.

By June 30, the executives submit their budget requests to MOSF. The budget requests follow the guidelines provided by the BO who specifies the spending ceilings. The budget request should reflect the results of the self-assessment and the in-depth evaluations of fiscal projects. The performance plans must be submitted along with the budget requests.

Between July and September, budgeting the specific details by project and sector officially begins. The MOSF reviews and revises the budget requests with regard to spending ceilings and the sectoral resource allocation directions. The specific steps are 1) budget ceiling, 2) past performance checks, and 3) redundant projects. Such review is carried out by the budget officials in the respective divisions of the budget office, and it is presented in the second budget review council, which examines the validity of each project. Until the final budget proposal is prepared by the MOSF in late September, two to three review sessions take place.

Through the Cabinet meeting followed by president’s approval, the government prepares the budget proposal and NFMP and submits these to the National Assembly by October 2, which is 90 days before the next fiscal year begins.

2.3.2.2. Formation of the Budget: Legislative Review and Approval

Once the budget is submitted to the National Assembly, it is sent to one of the 17 standing committees with authority over the relevant portions. After the committee review, the document is submitted to the Special Committee on Budget and Accounts, which then performs a detailed review of each agency’s budget requests. The sub-committee within the Special Committee then makes the necessary changes to the budget, submitting this revised proposal back to the Special Committee for passage. The budget proposal is then presented for a vote to a plenary session of the National Assembly. The Special Committee on Budget and Accounts plays a vital role in the overall budget process, as its final resolution is usually passed, and the president cannot veto the budget passed by the National Assembly.

The Korean Constitution mandates that the budget must be approved by December 2, which is 30 days prior to the beginning of the next fiscal year. If the National Assembly does not pass the budget proposal before the start of the new

102 • 2015/16 Knowledge Sharing Program with Uzbekistan fiscal year, the line ministries are allowed a continuing resolution, automatically spending up to the amount of the last year’s actual expenditures in the same period until passage of the budget proposal. If necessary, the BO may request a supplemental appropriation from the National Assembly in the middle of the fiscal year (Ha, 1997).

2.3.3. Budget Execution

Once the budget proposals are passed in the National Assembly, quarterly allotment plans are drawn up by the BO prior to the start of the fiscal year. The executives submit the budget allocation request to the MOSF, then it is used as a basis to prepare the budget allocation plan, which is reviewed by the Cabinet and finalized with presidential approval. The timing of the allotments is often set to accommodate favorable or to counter sluggish economic cycles. By mid- January, agencies are provided with guidelines for budget execution, which give direction, set standards, and provide a reference for the Board of Audit and Inspection during their annual reviews. Actual allotment is performed by the Treasury Bureau (which is currently under the MOSF), guided by both scheduled disbursement and the current state of the treasury. Agencies must submit their budget settlements to the Budget Office no later than the end of February in the subsequent fiscal year.

2.3.4. Budget Audit and Evaluation

After submission of the individual settlement reports, the BO compiles a settlement report to present to the Cabinet and president for approval. Under approval, the Budget Office submits the report to the Board of Audit and Inspection (audit office) on June 10. The audit office then presents its evaluation of the settlement report by August 20 to the Minister of Strategy and Finance, who then delivers the final settlement report to the National Assembly by September 2 (120 days before the start of the subsequent fiscal year). Once approved by the National Assembly, the administration will have no further political responsibility for budget execution.

2.4. Budget Management Methods

In the aftermath of the Asian Financial Crisis of 1997 that had a devastating impact on the Korean economy, the Korean government introduced a series of structural reforms in its budget system to fix the economic fundamentals and to invigorate the economy.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 103 Effectiveness in the Republic of Uzbekistan

A Series of Initiatives for Strengthening Budget Management

Year Items Remark

1994 Total Project Cost Management System

Performance-Oriented Budgeting System Pilot test with 16 agencies 1999 Preliminary Feasibility Study

2003 Top-Down Budgeting

National Fiscal Management Plan

2004 Performance Management System Submission of Performance Plan, all ministries

Fiscal Project Assessment System

2006 Program Budgeting

2008 Operation of KFMIS (DBAS) Since 2004

Accrual Accounting Since 1999 2009 Submission of Performance Report All ministries

The major focus of budgetary reforms in Korea was the adoption of a series of initiatives for strengthening budget management, as shown in

. The first reform was the installation of a performance-oriented approach in the system, which implies public expenditure management based on value for money. Accordingly, the Preliminary Feasibility Studies System, top-down budgeting, the National Fiscal Management Plan (Korean version of the Medium-Term Expenditure Framework), and various other measures were implemented, which will be explained in detail in the subsections of this chapter.

2.4.1. National Fiscal Management Plan (Medium-Term Expenditure Framework)8)

2.4.1.1. Background

Whether or not it was due to the withdrawal of the nationwide strategic plan in 1997, Korea suffered heavily from the Asian Financial Crisis, which raised public

8) Performance Management System of Budgetary Programs in Korea.

104 • 2015/16 Knowledge Sharing Program with Uzbekistan motivation to resume strategic resource allocation to combat the crisis. In need of a new national plan, one that was different from the previous totalitarian plans, the new plan followed the global trend of adopting the MTEF. The Korean version of MTEF known as the NFMP was introduced in 2004 as a five-year plan reflecting the changes in the economic conditions in public finance management, and it was reviewed and fixed on a rolling basis.

2.4.1.2. Main Functions of NFMP

The NFMP has three main functions, namely, medium-term macroeconomic stabilization, strategic resource allocation adhered to national priorities, and a predictable budget supply to line ministries.

• Macroeconomic Stabilization over the Mid-Term Period

Somewhat influenced by the British government's multi-year budgeting system, the Korean government adopted the five-year NFMP, a Korean MTEF, to strategically allocate its financial resources in a countercyclical manner. For example, to counter the economic impact of the global financial crisis in 2008, the Korean government undertook expansionary fiscal policy to provide countercyclical support to stimulate the economy. Although such expansionary policy increased the budget deficit temporarily, the government subsequently tightened its fiscal policy from 2011 onwards to recover from the deficit in a countercyclical manner.

• Strategic Allocation of Resources

The NFMP is a numerical representation of these policy priorities determined by the "social priorities" over a mid-term period.

• Sound Forecast and Stable Budget Support to Line Ministries

As NFMP ensures sound forecasts of revenues and expenditures, the ministries can forecast their budget allocation in the medium term. The key benefit of the NFMP is that the line ministries can set up medium-term strategies according to their priorities with a stable supply of financial resources.

2.4.1.3. Assessment and Lessons from NFMP

The NFMP is considered to be one of the best examples of a fiscal system introduced in Korea. The following changes have been observed after the introduction of the NFMP.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 105 Effectiveness in the Republic of Uzbekistan • First, with the adoption of NFMP, the budget process shifted from a mere myopic perspective to having a longer-term vision about national priorities. • Second, effective consultations have been provided when line ministries draw mid-term and long-term plans. Also, the government earned public trust, as policy is announced only after securing resources. • Third, NFMP introduced the “Meeting for Financial Resource Allocation” attended by the Cabinet to facilitate extensive discussion on the national priorities and various projects. As a result, rational and strategic allocation of resources has been pursued in budget formulation. • Fourth, public finance has served as an automatic stabilizer by adopting a longer-term approach with countercyclical measures for fiscal management.

2.4.1.4. Implications for Uzbekistan

Even though developing countries are often susceptible to fluctuations in revenue, many developing countries establish mid-term plans. What makes it worse is the huge impact from the unexpected changes in the international environment such as exchange rates, overseas aid, and foreign loans. Such volatility in annual revenue inevitably causes large gaps between the mid-term plans and the actual budget.

Therefore, it is recommended to install a special simulation function that creates scenarios about the financial future. In Korea, the “dBrain” has extensive simulation features. With a well-customized simulation function, the nation can plan expenditure frameworks, which are flexibly adjustable to unexpected changes in external environments.

2.4.2. Preliminary Feasibility Studies

The fiscal authority conducts the PFSs prior to budgeting for large-scale projects that cost more than 50 billion won to verify their feasibility. The PFS was introduced in 1997 with an aim to improve the efficiency of fiscal management and to prevent budgetary waste.

2.4.2.1. Background

Prior to the adoption of the PFS, each line ministry carried out a feasibility study. Line ministries contracted the government think tanks, professionals such as professors, and private enterprises for evaluation of the economic, technical, and policy feasibilities. The major drawback of this method was that the results were not objective, as line ministries frequently influenced the feasibility study in its own interests resulting in underestimated costs and overestimated benefits. More

106 • 2015/16 Knowledge Sharing Program with Uzbekistan seriously, some projects were not economically sound and subsequently failed, and the need to select projects in terms of economic validity had been raised. Hence, the government mandated that PFSs be conducted for new projects that cost more than 50 billion won (approximately USD 45 million).

2.4.2.2. PFS Features

PFSs are detailed studies that evaluate projects by using metrics and data specific to the projects under budgetary consideration. As an implementing agency, the Public Investment Management Center (PIMA) was established within the Korea Development Institute (KDI) with responsibilities to conduct research and manage the operation of PFSs. The PFS is conducted by a research team organized by PIMA (now PIMAC) consisting of various specialists from different backgrounds and organizations that helps incorporate diverse perspectives in appraisal, improvement in transparency and objectivity of the decision-making process.

[Figure 2-2] The PFS Procedures for Public Infrastructure Projects

Line Ministry Ministry of Strategy and Finance KDI (PIMAC)

Submit PFS Project Candidate Select PFS Progects

Request PFS Organize Teams/Conduct PFS

Make Investment Decisions Submin PFS Report

Feasibility Study or Stiop Announcement

Source: Korea Development Institute.

The PFS procedures for all types of public infrastructure projects are illustrated in [Figure 2-2]. In the initial stage, the line ministries submit a list of PFS candidate projects to the MOSF for the initial project selection. Once the selection is made, MOSF requests PIMAC to conduct the PFSs.

If the head of a line ministry proposes a project in a draft budget or NFMP, the PFS request must be submitted to the MOSF in the following year, taking into account the time required for PFS. However, if the project is urgent or faces unavoidable circumstances, the head of the line ministry can request a PFS for the project to be executed immediately in the following year.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 107 Effectiveness in the Republic of Uzbekistan For the PFS, the head of a line ministry prepares and submits a written request for a PFS specifying, inter alia, the draft project plan, a needs statement for project implementation, adequacy of government subsidy, amount of necessary resources and financing methods, factors of balanced regional development (or a needs statement for technological development for R&D projects), and the risks associated with the project and countermeasures.

The PIMAC then organizes a research team to conduct the PFS and submits the final reports to the MOSF upon completion. When conducting the PFS, the PFS Review Committee overlooks the whole review process .

The PFS analysis is conducted as shown in [Figure 2-3] using the analytic hierarchy process (AHP). This is a multi-criteria analysis method that facilitates economic and policy analysis and the analysis of balanced regional development to conduct a comprehensive evaluation of the project.

[Figure 2-3] The Analytic Hierarchy Process (AHP) of the PFS

Organization of the Research Team

Basic Planning: Formulation of Project Plans

Project Outline and Basic Data Analysis

· Background, Purposes, Expected Effects of Projects · Regional Conditions · Case Analysis of Similar Facilities · Understanding of Issues of Projects

Economic Analysis Policy Analysis Balanced Regional Debelopment

Policy Consistency and Project Demand Estimation Implmentation Will Technical Review The Degree of Regional Rist Factiors in Project Implementation Benefit Estimation Economic Backwardness Project-Specific Evaluation Items Cost Estimation Regional Economic Ability to Procure Fiscal Resources Cost-Benefit Analysis Vitalization Consistency with Higher-level Plans Financial Analysis Environmental Assessment

Comprehensive Evaluation: AHP

Justifiability of Project Implementation Fiscal Resource Procuring and sharing Methods Investment Timing and Project Period Other Policy Proposals

For the economic analysis, a cost-benefit analysis is generally conducted, but in the case of the non-investment fiscal sectors, such as those related to social welfare or R&D projects, cost-effective analysis is undertaken. As for the policies concerned, either quantitative or qualitative analysis is carried out to evaluate their

108 • 2015/16 Knowledge Sharing Program with Uzbekistan consistency, implementation willpower, and risk factors associated with the project implementation. The technical analysis evaluates how suitable the technology is, how likely it is to succeed, and whether there is any overlap with new and existing technologies. The analysis for balanced regional development is conducted to prevent regional imbalances and to promote equity.

The AHP score is then weighted to determine the project’s appropriateness. In general, an AHP score above 0.5 indicates that a project is feasible.

2.4.2.3. PFS Results

Overall, the PFS has undoubtedly contributed significantly to the development of Korean budgetary management. After the introduction of the PFS, 665 projects costing 303 trillion won underwent PFS between 2003 and 2008, and of these, 243 projects worth 128.7 trillion won were proven unjustified and subsequently suspended. This is a significant result, as only 1 out of 33 projects was deemed to be unjustified between 1994 and 1998 before the adoption of the PFS system.

2.4.3. Total Project Cost Management

TPCM aims to improve the efficiency of fiscal spending through reasonable adjustment and total project cost management of large-scale projects funded by the National Treasury in each stage of project implementation. Currently, TPCM is conducted on projects lasting more than two years and involving over 50 billion won (or the cost of construction higher than 20 billion won). Accordingly, the executives determine the project size, total project cost, and project period, and negotiate with the fiscal authority. Any ex post alterations are strictly controlled.

For large-scale public investment projects, an excessive increase in project costs resulted in a waste of the national budget. Systematic tools were developed since the systematic management of public investment projects became necessary at the beginning of the 1990s. Hence, the TPCM was introduced in 1994 to prevent the increase in project costs resulting from uncontrolled adjustments in large-scale investment projects.

Because of the introduction of PFS in 1999, project feasibility was analyzed well in advance, which prevented reckless increases in total project costs. In 2004, the requirement criteria and methods for the PFS retest were specified in the TPCM guideline. As the retest system for demand estimation was introduced in 2006, changes in project demand have been managed in each project implementation stage. Most significantly, the National Finance Act legislated in 2006 brought forth the procedures and principles for the management of the total project costs.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 109 Effectiveness in the Republic of Uzbekistan 2.4.4. Performance Management System

Prior to the introduction of PMS, the detailed content of projects and fraud was not easily understood. As a result, waste and misuse were hardly noticed. More seriously, performance was not appropriately evaluated, and only the central budget office was fully in charge of the budget.

To fix the shortcomings, PMS was introduced in 2004 with three components: 1) the PGMS that resembles of the GPRA of the United States, 2) the FPAS that is similar to the PART of the United States, and 3) IAS to evaluate the adequacy and efficiency of the projects designated by the BO using sophisticated analytical tools.

[Figure 2-4] Performance Management System of Fiscal Projects

PGMS (2003~) FPSA (2005~) IFPES (2006~) (1st Step, Monitoring) (2nd Step, Review) (3rd Step, Evaluation)

Management of performance Annual in-depth Annual evaluation of goals and indicators of evaluation of about 10 one third of major fiscal fiscal projects of all projects and systemic projects government agencies reform

Source: The Ministry of Strategy and Finance (2014).

2.4.4.1. Performance Goal Management System

According to the National Finance Act, the head of each line ministry prepares the performance plan that is in line with achieving the organizational strategic objectives and goals, and submits the plan. The executives assemble the submitted annual performance reports, and the results are reported to the “dBrain,” the digitalized national budget and accounting system.

Once the goals are met, each agency provides a detailed statement on the efforts made to achieve the goals. In particular, performance targets, budget adjustments, and future plans must be followed. Contrarily, if the goals are unmet, subsequent reasons must be clearly stated and the improvement plan must be devised.

2.4.4.2. Performance Plan and Performance Report

Following the Asian financial crisis in 1997, pilot projects were first conducted in 1999 as part of the introduction of the PMS. Accordingly, 16 ministries and agencies were selected and requested to develop performance indicators. However,

110 • 2015/16 Knowledge Sharing Program with Uzbekistan the first drawn performance budget for 2000 revealed shortcomings, as some performance targets were too abstract, and some of the indicators were regarded as inappropriate for assessing performance. Therefore, revisions were made among the relevant organizations and the BO within the Ministry of Planning and Budget (now the MOSF).

The performance plans of the 16 pilot projects were submitted to the National Assembly, which were also available to the public on the ministry website. Moreover, feedback and reviews on the performance plans were collected from experts. The number of ministries and agencies in the pilot projects continued rising until the National Finance Act was enacted in September 2006 that mandated preparation and submission of performance plans and reports to the National Assembly by all central ministries and agencies. Accordingly, the “2007 Performance Report” from all line ministries was published in 2008.

In the performance report, settlement of accounts, performance level by indicator, and project costs are included. Particularly when reporting the performance, input costs per performance goal should be indicated. From 2009 onwards, as the accrual accounting system was introduced, both direct and indirect costs such as personnel expenses and other supporting expenses were included as input costs.

2.4.4.3. Fiscal Project Assessment System

If the PGMS monitors the accomplishments toward a goal, the PFAS evaluates the efficiency and adequacy of the projects. Efficiency is determined by whether the intended outcomes are met and measured, whereas adequacy is evaluated by the appropriateness of the methods of operating projects and input.

The Korean government introduced the Government Administration Assessment Act in 2006, and the performance evaluation system for central agencies was subsequently introduced with five valuations criteria: 1) main policies, 2) fiscal performance, 3) personnel management, 4) organization, and 5) informatization.

Among these, fiscal performance is separately assessed based on the NFA under the FPAS. For that reason, the FPAS is managed by the MOSF and other evaluations are supervised by the Office for Government Policy Coordination, a Secretariat of the Prime Minister.

For the FPAS, one-third of the fiscal projects managed by each line ministry is chosen in consultation with the MOSF. Then, a questionnaire composed of 11 questions in three categories—planning, management, and performance and

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 111 Effectiveness in the Republic of Uzbekistan feedback—are framed for evaluation. The questionnaire is then distributed to each line ministry with one to three additional questions relevant to project type. These are typically in a yes or no format, and the MOSF may conduct meta- or in-depth evaluations based on the self-evaluated results.

A project falls under the performance categories ranging from excellent to good, average, poor, or extremely poor. The measured performance, in turn, affects funding for projects such that the projects with a rating of excellent or good will increase and those that are poorly rated will face budget cuts of more than 10%.

2.4.4.4. Assessment Procedures

The FPAS proceeds with two processes, namely, the self-assessment on each project by the line ministry and confirmation of the MOSF review of the assessment results.

• Self-Assessment Stage

The line ministries and agencies organize a self-assessment committee to conduct the self-assessment. For the assessment, one-third of the organization’s fiscal projects are selected annually by agreements with the Prime Minister’s Office and MOSF. The evaluation criteria fall under three categories: project planning, management, and performance.

Each organization self-assesses half-yearly achievements in June annually on a rolling basis to examine annual performance in between January and February. The five-step evaluation is comprised of the following: - Planning (validity of project objectives and content) - Promotion (rationality of project development scheme) - Implementation (suitability of project management, implementation, and performance management) - Outcome (achieved performance) - Utilization (utilization of evaluation results)

Based on the questionnaire (yes/no format), Evaluation Committee members conduct the evaluation, and the head of the committee announces the final comments after gathering the evaluation results.

Absolute ratings are allocated based on the final scores, and the projects that receive a low rating may face budget cuts in the following year.

112 • 2015/16 Knowledge Sharing Program with Uzbekistan • Second Evaluation Stage

The Fiscal Project Evaluation Division of the MOSF is in charge of the fiscal performance assessment within the self-assessment. Meta-evaluation is conducted based on the self-assessment results under the following procedures. - Organize the Meta-Evaluation Committee and support group - Verify and inspect the results - Obtain any objections - Finalize the results - Undertake corrective actions

For a fair assessment, external experts are appointed as members of the Meta- Evaluation Committee who 1) inspect the suitability of the performance goals and self-assessment indicators, 2) preserve the objectivity and fairness of the self- assessment methods and the assessment process, and 3) determine the need for integration or abolishment of related or duplicate projects.

Prior to finalizing assessment results, the committee transmits the draft results to the line ministries and accordingly receives objections. The assessment results are finalized by May 29 after the objections are reviewed.

• Utilization of FPAS Results

utilization of FPAS results is as follows.

First, the evaluation results are reflected in the formulation of the next year’s budget in such ways that the budget for poorly performing projects by the meta- evaluation is recommended to be cut by 10% or more. However, if the root cause of the low performance is problematic, then the projects are excluded from the budget cuts. Even projects with excellent ratings may face budget cuts if there are overlapping investments or the need to restructure or redesign.

Second, the meta-evaluation results are utilized for restructuring and enhancing the projects. Improvement in projects that underperform provides the crucial decision criterion in budget requests and budget discussions for the following year.

Third, the results are taken as valuable information for the respective agencies’ policy decision.

Having continued over years, the line ministries have purposefully improved their performance to avoid low performance ratings. As a result, the ratio of projects with poor and extremely poor performance decreased from 15.7% in 2005

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 113 Effectiveness in the Republic of Uzbekistan to 5.3% in 2007, exemplifying the effectiveness of the FPAS.

2.4.4.5. Lessons from the Korean Performance Management System

Korea made huge efforts to enhance the effectiveness of public finance. Drawing from the best practices of such system, the government tailored these practices into a unique Korean model for a performance management system. APFS was introduced as a proactive tool, and the FPAS, performance plan, and report system were adopted for ex ante performance evaluation. Hence, one can say that the Korea’s performance management system is firmly established as of now. It is no doubt that the system increased the operative efficiency of public finance, strengthened distributive efficiency, and promoted fiscal discipline.

However, it is difficult to develop the indicators that measure the social preference and uprightness of a project. For instance, the calculation of benefits is difficult with PFS, and organizing the measurement indicators is problematic with FPAS. The measurement accuracy is a great challenge with the performance plan and report system. Although these performance indicators and measurements have improved over the past ten years, there is still room for improvement as consensus is needed on their validity and reliability. Moreover, there are no incentives for projects that have an excellent rating currently, but budget cuts are made for the underperforming ones; thus, it is a negative incentive system.

Like Korea, developing countries may be tempted to introduce the performance management system to improve the public sector’s productivity. Adoption may be easy; however, whether operative and distributive efficiency will improve is not guaranteed. Therefore, it is necessary to customize the performance management system to fit into the current system. It may be more appropriate to refer to PFS and promote the performance management in the early resource allocation stage. Furthermore, project managers and budget staffs should be given easy access to performance information, and such performance information should be used when making fiscal decisions. In order to develop a truly suitable performance management system in a country, the integrated fiscal information system, “Dbas” (digital budget and accounting system) in Korea, should be installed to facilitate the unified use of performance information.

2.5. Health Financing System in Koreas

This section provides an outlook on the health financing system in Korea, detailing its institutional frameworks and the operation schemes. The three key health financing functions are resource mobilization, pooling, and purchasing/ provisions to achieve 1) sufficient resource collection, 2) accessibility, and 3) optimal

114 • 2015/16 Knowledge Sharing Program with Uzbekistan use of resources, ultimately aimed to achieve and maintain universal coverage. The details of the financing actors are provided below.

2.5.1. Korean Healthcare Financing System and the Key Actors

Financing for the healthcare system is mainly funded through social health insurance contributions, government subsidies, and out-of-pocket payments by the users. [Figure 2-5] provides an overview of the Korean health financing system.

[Figure 2-5] An Overview of the Korean Health Financing System

EMPLOYER Contribution National Heath Subsidies, etc Insurance Funds GOVERNMENT Medical Aid (NHIC) Programme

Public Health Programmes Taxes HEATH CENTRE

Fee for service POPULATION PHARMACY Out-of pocket payments Fee for service Doctor's Clinic

Fee for service PATIENT HOSPITAL

Source: OECD (2003).

The National Health Insurance Service (NHIS), MOHW, and subnational governments are the key financing actors. As can be seen [Figure 2-5], NHIS collects contributions from the population, pools the funds, and provides fees to the health providers. The national health insurance (NHI) membership is mandatory for the population, and roughly 96.4% of the population is covered by the NHI (NHIS, 2014); the remaining population is covered by the Medical Aid Program that is financed through government revenues. The NHI contribution rate is 5.08% of salary or income depending on the type of insures . The NHI system is predominantly funded through contributions, government subsidies, and out-of- pocket (OOP) payments by the users of health services. In 2014, public financing accounted for 54.9% of the total health expenditures, while private financing remained at 45.1%.

Additionally, the relationships among consumers, health providers, and financing actors are provided in [Figure 2-6].

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 115 Effectiveness in the Republic of Uzbekistan [Figure 2-6] The Relationship among Consumers, Health Providers and Financing Actors

NHIC, HIRA (Ellgiblity·Collection·Payment Review·Assement)

Review

Claims ·Payment MOHW Insurance Benefits (General Supervision·Laws) MAP Contribution Beneficiaries

Medical Care Services The Insured Providers Co-payments

Out-of-pocket expenditure

Private Health Insurance

Source: National Health Insurance Service (2014).

2.5.1.1. Ministry of Health and Welfare

MOHW is responsible for supervising and managing the health financing system. MOHW also operates promotion and preventive healthcare as well as various other social welfare programs.

2.5.1.2. National Health Insurance Service

The NHIS, formerly NHIC until 2012, is the major financing agent that offers curative care. All Koreans are obliged to be insured under NHI except the medical aid programs’ beneficiaries that account for roughly 3% of the population.

The NHI is primarily financed by contributions from the population. According to the National Health Insurance Act, the government transfers 14% of the estimated NHIS revenues. NHIS can receive additional government subsidies from the Health Promotion Fund amounting to approximately 6% of the estimated total revenue. Hence, the total government subsidies should be roughly 20% of NHI contributions. This is an important share of NHIS revenues.

116 • 2015/16 Knowledge Sharing Program with Uzbekistan 2.5.1.3. Health Insurance Review Agency (HIRA)

HIRA was established in July 2000 when the NHI Act was introduced. It is primarily funded by NHIS to provide independent reviews of claims according to the medical fees and standards adherence. Additionally, it administers a remuneration system for the health providers and conducts assessments on benefits packages, pharmaco-economic evaluation (PE), and quality assessments of providers.

2.5.2. Discussion

The differences between the Korean and Uzbekistan health financing system must be noted. Contributions from Korean citizens are the predominant source of the health financing system’s health expenditures, i.e., a “social health insurance system,” whereas in Uzbekistan, the main source of health expenditures is government revenues, i.e., a “tax-based system.” Moreover, in Korea, roughly 90% of healthcare services are provided in the private sector, compared to Uzbekistan where most healthcare is provided by the public sector.

Therefore, the institutional framework and key players in the health system inevitably differ. In Korea, the major player in the healthcare financing system is NHIS who pools contributions and purchases the healthcare. In Uzbekistan, MOF is the predominant player in health financing. In addition, the largest contributor to the development of the Korean health system was the successful introduction of National Health Insurance rather than budget support from the government or a direct investment. However, an analysis of the NHIS financing is beyond the purpose and scope of this research, but it can be discussed further upon request by the government of Uzbekistan.

3. Analyses of Uzbekistan Cases

Uzbekistan is one of the largest Central Asian states. The total area of the country is 447.4 thousand square kilometers, and the population density is 63.4 people per square kilometer. Uzbekistan ranks fifth in terms of territory among countries of the former Soviet Union. The average population of the republic as of January 1, 2013 was 29,993.5 thousand people, of whom 51.4% live in urban areas and 48.6% reside in rural areas. In terms of population, Uzbekistan ranks first among Central Asian countries.

To date, agriculture provides more than 40% of the gross national product. Until recently, cotton was the main monoculture. The country has highly developed energy, chemical, oil and gas, and engineering industries. There are rich natural

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 117 Effectiveness in the Republic of Uzbekistan resources of minerals, gas, and gold. The country is administratively subdivided into 12 provinces and the Republic of Karakalpakstan. There are 157 rural districts, 119 cities, and 114 townships in the country.

The Republic of Uzbekistan is a country with a relatively “young” population. The proportion of children aged 0–15 years at the beginning of 2012 was 28.1% of the total population, while the proportion of the population over 65 years of age was 5.9%. The average fertility rate was for 21.0% at the end of 2012, and the mortality rate was 4.9 per 1,000 people. The natural population growth rate is positive with 16.1 per 1,000 people.

3.1. Overview of Uzbekistan’s Budget Process

The Ministry of Finance of the Republic of Uzbekistan spoke to the Parliament of Uzbekistan regarding the 2015 budget, including drafts of the State Budget of the Republic of Uzbekistan and budgets of the state trust funds, as well as the main directions of tax and budget policy for 2015.

It was noted that the project of the main financial document of the country— the state budget for 2015 and the budgets of the state trust funds, as well as the main directions of tax and budget policy—are developed based on the priorities of socio-economic development defined by the Islam Karimov, President of the Republic of Uzbekistan.

The submitted projects aim to progressively grow the economy, preserve economic stability and balanced export growth, provide a positive foreign trade balance, and improve economic competitiveness. In 2015, it was envisaged to continue the active implementation of programs of accelerating and expanding modernization, technical and technological renovation of production, as well as the rapid development of road transport and engineering communication infrastructure.

In the coming year, it is expected that GDP will grow by 8%, industrial production by 8.3%, agricultural production by 6%, and investment volume by 9.6%.

The Budget Code of the Republic of Uzbekistan entered into force on January 1, 2014 to serve as the main legal basis for the formation of the budget message for 2015. Its norms and regulations have made it possible to increase the efficiency of the use of funds allocated from the state budget and the state trust funds.

In 2015, it was envisaged to further reduce the tax burden, promote sustainable

118 • 2015/16 Knowledge Sharing Program with Uzbekistan economic growth, ensure a balanced budget system, increase the efficiency of budget allocations through the increased use of government programs in the budget direction, and continue the trend of social development, income growth, savings and purchasing power of the population with simultaneous targeted social support to families in need, and other measures.

The state budget projects and state trust funds’ budgets, as well as the main parameters of the tax and budget policy for 2015 were previously discussed at meetings of the political parties and the deputy group of the Ecological Movement, a number of committees of the Legislative Chamber with participation of representatives of the Ministry of Finance and other relevant ministries and agencies.

In particular, in Uzbekistan, a set of important measures is being implemented to further the country’s economic reformation and modernization, maintain a balance of key macroeconomic indicators, and continue the adopted strategy that ensures a high rate of economic growth due to directions and priorities of the economic program for 2014. All of this contributes to the successful attainment of the current year's macroeconomic indicators, implementation of the main directions of tax and budget policy, as well as the execution of Uzbekistan’s state budget.

In particular, the reduction of the unified social tax from 25% to 15% for micro- and small businesses and farms will reduce the tax burden by 481.8 billion soms and serve as an additional source of working capital to implement technological upgrades and promote workers . This applies to the reduction of the basic income tax rate for business entities from 8% to 7.5%, as well as the rates for single tax payments from micro- and small construction enterprises from 6% to 5%. This will leave about 141 billion soms at the disposal of enterprises, which will be directed towards modernizing production.

The members pay particular attention to increasing the share of the state budget allocated to social programs. In 2015, as a percent of GDP, the state budget’s social expenditures were 12.8% as follows: education 7.3%, healthcare 3.1%, and social benefits to low-income families, financial assistance, and payment of compensation 1.3%. The social welfare spending of the state budget compared with the current year will increase more than 1.2 times, which will allow for continuous improvement of the population’s welfare.

However, proposals were made to strengthen parliamentary control over the receipt of the state budget and its effective use, especially for the budget devoted to social support.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 119 Effectiveness in the Republic of Uzbekistan The 2015 state budget provided an expenditure increase of more than 1.24 times compared to 2014 to maintain cultural departments and conduct sporting events. However, at the expense of the 2015 state budget, it was also envisaged to ensure the implementation of government programs to improve the architectural and planning appearance of the country’s cities, which was approved by the president and government of the Republic of Uzbekistan. This will help create a more comfortable environment for the residents in the country’s cities and villages.

3.2. Budget System Legislation

The budget system legislation comprises this law and other legislative acts. If the international agreements signed by the Republic of Uzbekistan provide for rules other than those specified in the budget system legislation of the Republic of Uzbekistan, the relevant provisions of international agreements shall prevail.

3.3. National Budget System

The budget system shall be a composition of different levels of budgets and beneficiaries, organization and budget formation principles, interrelations among them, and among the budgets and recipients of the budget means arising during the budget process. The budget preparation, consideration, adoption, and monitoring on all budget levels for a fiscal year shall be performed in the national currency of the Republic of Uzbekistan: the som.

The budget system of the Republic of Uzbekistan shall have the following main principles: • Uniformity in the budget classification, budget documentation on accounting, and budgetary process • Correspondence of the budgetary arrangements to the administrative and territorial organization of the Republic of Uzbekistan • Interdependence of budgets at various levels • Balancing of the state budget • Planning of the state revenues and expenditures by specific sources and directions (expenditure items) • Implementation of the state budget expenditures within the statutory appropriation limits • Independence of the budgets at all levels

120 • 2015/16 Knowledge Sharing Program with Uzbekistan 3.4. State Budget System

The state budget comprises 1) the republican budget, 2) the budget of the Republic of Karakalpakstan, and 3) the local budgets. Budgets of the state ad hoc funds shall be consolidated into the state budget.

The budget of the Republic of Karakalpakstan shall comprise the republican budget of the Republic of Karakalpakstan and the budgets of districts and towns under the republican (Karakalpakstan) jurisdiction. The spovince (oblast) budget shall comprise the budget of the province (oblast), the budgets of districts and towns under the jurisdiction of the relevant province (oblast). The budget of a city divided into districts (rayons) shall comprise the city budget and district budgets of the relevant city. The budget of a district shall comprise the relevant district budget and the budgets of smaller towns under the jurisdiction of the relevant district.

3.4.1. Classification of the State Budget

The budget classification means the grouping of budget revenues and expenditures within the state budget and sources for financing the deficit thereof. The budget classification shall be used for budget data systematization in order to generate, consider, adopt, and implement the state budget and provide compatibility of the budget data with those of international classification systems. The budget classification shall comprise • Classification of the state budget revenues • Functional, organizational, and economic classification of the state budget expenditures • Classification of sources to finance the state budget deficit • Classification of the state budget revenues shall be the grouping thereof by type and source in accordance with the legislation

The functional classification of the state budget expenditures shall be the grouping thereof by the functions of the state administrative bodies, local governance authorities, as well as other budget organizations (spending agencies).

The organizational classification of the state budget expenditures means the grouping thereof by type of economic agent and activities that reflect the allocation of budget funds among their direct beneficiaries.

The economic classification of the state budget expenditures means the grouping of the state budget expenditures by economic purpose and type of payment.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 121 Effectiveness in the Republic of Uzbekistan The classification of the sources for financing the state budget deficit shall be the grouping thereof by internal and external sources. The budget classification shall be developed and approved by the Ministry of Finance of the Republic of Uzbekistan in accordance with the procedures established by the legislation.

3.4.2. State Budget Revenues

The state budget revenues shall be raised through • Taxes, charges, duties, and other obligatory payments as established in the legislation • Revenues from investing, leasing, or selling of state-owned financial and other assets • Funds carried over to the state ownership through the right of inheritance or gifts as provided by legislation • Charitable funds from legal and physical entities as well as foreign states • Repayment of budgetary loans extended to legal resident entities and foreign states • Other revenues that comply with the effective legislation

3.4.3. State Budget Expenditures

The state budget resources shall be expended within the approved appropriation limits as • Current expenses of the recipients of budget means • Current budget transfers • Capital expenditures for procurement and reproduction of fixed assets and facilities (including related works and services for state) such as - Purchase of land and other property to meet the state needs outside the Republic of Uzbekistan - Acquisition of rights for land and other intangible assets for state needs - Establishment of state reserves • Budget transfers to legal entities to cover capital expenditures • Budget loans to legal resident entities and foreign states • Budget subsidies and budget loans to the state ad hoc funds • Repayment and servicing of the public debt • Other expenditures compliant with the effective legislation

3.4.4. Ascription of Funds Distributed among Budgets to Expenditures and Revenues

Within the state budget, there exists a range of transactions (budget

122 • 2015/16 Knowledge Sharing Program with Uzbekistan expenditures) from which the relevant payments shall be made, while representing the revenues of the budgets to which they will be allocated, such as • Budget subsidies and budget subventions (within the authorized limits) • Budget loans and repayment thereof • Other transactions compliant with this law and the state budget adopted for the relevant year

3.5. Preparation, Consideration, and Approval of the State Budget

3.5.1. Main Principles of the Budget System

Annually, the Ministry of Finance of the Republic of Uzbekistan within the terms established by the Cabinet of Ministers of the Republic of Uzbekistan shall submit budgetary requests for the following fiscal year • to the Council of Ministers of the Republic of Karakalpakstan, hokims of provinces (oblast), and the city of Tashkent, the bodies administering the state ad hoc funds to prepare draft budgets for the relevant territories and state ad hoc funds to recipients of budget means financed from the republican budget to prepare applications for budget appropriations

3.5.2. Timing for Preparation of Draft State Budget

Applications for budget appropriation for the ensuing fiscal year shall be submitted as follows: • by the recipients of budget means financed from the budget of the Republic of Karakalpakstan and local budgets to the respective financial bodies no later than June 1 of the current year • by the recipients of budget means financed by the republican budget to the Ministry of Finance of the Republic of Uzbekistan no later than July 1 of the current year

Draft budgets for the ensuing fiscal year shall be submitted as follows: • by financial bodies of hokimiyats of districts and cities to the upper-level financial bodies on the terms and procedures established by respective local authorities but no later than June 25 of the current year • by the Council of Ministers of the Republic of Karakalpakstan, hokims of the province (oblast), and the city of Tashkent, the bodies administering the state ad hoc funds to the Ministry of Finance of the Republic of Uzbekistan within the timeframe and procedures established by the Cabinet of Ministers of the Republic of Uzbekistan no later than July 1 of the current year

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 123 Effectiveness in the Republic of Uzbekistan The Ministry of Finance of the Republic of Uzbekistan shall prepare the draft state budget for the ensuing fiscal year and shall submit it to the Cabinet of Ministers of Uzbekistan before September 15 of the current year.

State Budget Expenditures

Recipients of budget means shall use the state budget funds within the budget appropriation limits in accordance with the expenditure estimates gradually during the fiscal year by drawing up a certificate of destination for a specified period and for the respective amount. For the organizations financed from the republican budget, it is managed by the Ministry of Finance of the Republic of Uzbekistan, while for the organizations financed, it comes from the budget of the Republic of Karakalpakstan or local budgets by the corresponding financial body.

The procedure for preparation, documentation, issuance, administration, and accounting of the certificates of destination shall be determined by the Ministry of Finance of the Republic of Uzbekistan. The remaining budget balances on the budget accounts of the Republic of Karakalpakstan and local budgets of all levels shall be used to form the operating cash balance in the authorized amount. The balance thereof, the amount exceeding the authorized cash balance limit, may be realized to cover additional expenditures if so decided by the Council of Ministers of the Republic of Karakalpakstan and the respective hokims. The remaining budget balances on the accounts of the budget organizations, excluding the funds to finance capital investments, shall not be withdrawn and shall be entered into the special accounts of the budget organizations. The procedures for generating and spending the special funds by the budget organizations shall be determined by the Cabinet of Ministers of the Republic of Uzbekistan.

If the Law on State Budget for the ensuing fiscal year has not been passed before the beginning of that year, then before the adoption of the state budget, the budget expenditure shall be realized as follows: • The expenditure in the fiscal year that has started shall be made on a monthly basis in accordance with the procedure established by the Cabinet of Ministers of the Republic of Uzbekistan and within the amounts not exceeding one-third of the budget appropriations of the last quarter of the previous fiscal year. • The budget expenditures not incurred in the previous fiscal year shall not be made in the current fiscal year. • The tax regime and obligatory payment arrangements in force from the previous year shall remain effective until the state budget has been enacted.

If the state budget has been enacted after the beginning of the fiscal year, the total expenditure amount during the fiscal year shall be brought to consistency with

124 • 2015/16 Knowledge Sharing Program with Uzbekistan the adopted state budget.

3.5.3. Implementation of State Budget within Established Parameters

The Jokargy Kenes of the Republic of Karakalpakstan and the local representative bodies shall not perform any actions to decrease revenues or increase expenditures of the state budget if such actions result in the increase of the budget deficit over the statutory threshold.

If, throughout the fiscal year, upon the adoption of the budget of the Republic of Karakalpakstan and the local budgets, a decision of the Jokargy Kenes of the Republic of Karakalpakstan and respective local representative body leads to a reduction of budget revenues from individual sources, such decision may be adopted, provided a different source of revenue is stipulated for and/or the expenditure items are reduced for the corresponding amount.

If, throughout the fiscal year, upon the adoption of the budget of the Republic of Karakalpakstan and the local budgets, a decision of the Jokargy Kenes of the Republic of Karakalpakstan and the respective local representative body leads to a reduction of expenditures and/or increased revenues of the respective budget, the resulting surplus shall be withdrawn into the budget of the level that has taken the said decision to be reallocated in accordance with the legislation.

If, throughout the fiscal year, after the adoption of the state budget, the body authorized thereby has decided to increase (decrease) the state budget appropriations, the Ministry of Finance of the Republic of Uzbekistan, the territorial financial bodies of the Republic of Karakalpakstan, provinces (oblast), and the city of Tashkent shall introduce corresponding amendments into the budgets of the respective levels. The increase or reduction of expenditures shall be made by settling accounts between the budgets of various levels. The said settlement procedures among the budgets shall be established by the Ministry of Finance of the Republic of Uzbekistan.

Any revenues that the budgets of the Republic of Karakalpakstan and the local budgets receive in addition to the approved parameters as a result of efforts to improve the tax and budget payment discipline may be used to cover expenditure items above the adopted budget, provided the operating cash balance limits remain at the statutory level. Such decisions shall be made by the Council of Minister of the Republic of Karakalpakstan and the respective hokims.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 125 Effectiveness in the Republic of Uzbekistan 3.6. State Budget Revenue and Expenditure Management

The Ministry of Finance of the Republic of Uzbekistan and financial bodies shall be responsible for administering the state budget and the budgets of the lower levels within the parameters established by the legislation. The Ministry of Finance of the Republic of Uzbekistan shall manage the state budget expenditures and revenues.

If there is a considerable reduction of government revenues throughout the year and the forecasted state budget deficit exceeds the statutory limit, the Cabinet of Ministers of the Republic of Uzbekistan shall submit a proposal to reduce state budget expenditures by specified items to the Oliy Majlis of the Republic of Uzbekistan in accordance with the procedure established by the effective legislation. In order to bridge the temporary gap between the revenues and expenditures of the budgets of various levels throughout the fiscal year, said budgets may receive loans from the respective budgets. The time limits and procedures for issuing loans shall be established by the Ministry of Finance of the Republic of Uzbekistan.

The temporary gap between the revenues and expenditures of the budgets of various levels may be bridged throughout the fiscal year from the operation cash balance that will be restored back to the authorized amount at the end of the fiscal year, balances of underutilized budget funds , and by issuing short-term government securities as per statutory procedures.

3.7. Supervision over State Budget Administration

The Ministry of Finance of the Republic of Uzbekistan and the territorial financial bodies, in order to perform supervisory functions, shall • Consider budget implementation performance at various budget levels • Receive information from tax and customs authorities and bodies administering the state ad hoc funds on receipts into various budget levels • Request information from the recipients of budget means on receipts and expenditures of the budget appropriations • Receive information on budget cash flows from the banks as provided by legislation and within their powers, perform audits and verifications to monitor the performance of the recipients of budget means.

The Cabinet of Ministers of Republic of Uzbekistan shall consider the State budget implementation results submitted by the Ministry of Finance of the Republic of Uzbekistan on a quarterly basis.

126 • 2015/16 Knowledge Sharing Program with Uzbekistan 3.8. Reports on Implementation of the State Budget

The recipients of budget means funded from the republican budget shall submit reports on the utilization of the budget appropriations for the period reported to the Ministry of Finance of the Republic of Uzbekistan within the timeframe established by the latter. The recipients of budget means funded from the budget of the Republic of Karakalpakstan and the local budgets shall submit reports on the utilization of the budget appropriations for the period reported to the respective financial bodies within the timeframe established by the Ministry of Finance of the Republic of Uzbekistan.

The financial bodies of the oblast or the republic (Karakalpakstan) subordinated cities and districts shall submit reports on the implementation of the respective budgets to the correspondent hokimiyats and the higher-level financial bodies within the timeframe established by the Ministry of Finance of the Republic of Uzbekistan.

The Ministry of Finance of the Republic of Karakalpakstan, financial bodies of provinces (oblast), and the city of Tashkent shall submit reports on the implementation of the respective budgets for the reported period to the Council of Ministers of the Republic of Karakalpakstan and respective hokimiyats and the Ministry of Finance of the Republic of Uzbekistan within the terms established by the latter.

The Council of Ministers of the Republic of Karakalpakstan, hokims of Province (oblast), districts, towns, and the city of Tashkent after consideration and approval of the reports on budget implementation shall submit accordingly to the Jokargy Kenes of the Republic of Karakalpakstan and respective local authorities within the terms established by the legislation.

The State Tax Committee and the State Customs Committee of the Republic of Uzbekistan shall submit monthly reports to the Ministry of Finance of the Republic of Uzbekistan on taxes, duties, and other obligatory receipts into the state budget for the period reported within the legally established terms.

Local tax authorities shall submit monthly reports to the respective financial bodies on taxes, duties, and other obligatory receipts into the state budget for the period reported within the legally established terms.

The bodies administering the state ad hoc funds shall submit reports to the Ministry of Finance of the Republic of Uzbekistan of receipts to and expenditures

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 127 Effectiveness in the Republic of Uzbekistan from the state ad hoc funds for the period reported within the terms established by the Ministry of Finance of the Republic of Uzbekistan.

The Ministry of Finance of the Republic of Uzbekistan shall submit a report on the implementation of the state budget to the Cabinet of Ministers of the Republic of Uzbekistan no later than May 1 of the year following the year being reported.

The Cabinet of Ministers of the Republic of the Uzbekistan shall report on the implementation of the state budget to the Oliy Majlis of the Republic Uzbekistan no later than May 15 of the year following the year being reported. The report on the implementation of the state budget shall be considered and approved by the Oliy Majlis of the Republic of Uzbekistan.

The reports on the implementation of the budget of the Republic of Karakalpakstan and the local budgets shall be considered and approved by the Jokargy Kenes of the Republic of Karakalpakstan and respective local authorities.

4. Healthcare in the Republic of Uzbekistan

From the early days of independence, Uzbekistan initiated fundamental changes within the healthcare system, which was previously characterized by a centralized structure, inefficient governance mechanisms, and an inability to fully cater to people's needs for healthcare services.

In the early 1990s, Uzbekistan inherited a public healthcare system based on the Soviet “Semashko model,” which was characterized by an extensive hospital sector and network of health facilities that were rigidly managed and regulated both in terms of financing and decision-making and policies were set centrally. Inpatient care was financed according to the number of beds, which resulted in a gradual increase in expensive bed numbers, not adapted to the actual needs of the population for primary healthcare services. Health facilities had outdated equipment not suitable to ensure high-quality diagnosis and, accordingly, treatment. In many instances, insufficient equipment and the low skill level of the health staff prevented the delivery of highly technological healthcare services even at specialized clinics.

Moreover, the healthcare system appeared to be unprepared for the new requirements during the transition to a market-based economic system. Accordingly, at the beginning of the transition period, the country’s population health indicators worsened; for example, maternal and child mortality increased and a higher incidence of infectious diseases was reported. Overall, this resulted in

128 • 2015/16 Knowledge Sharing Program with Uzbekistan a decrease in life expectancy, one of the most important indicators for population health, but has since then shown an upward trend.

In the second half of the 1990s, the Ministry of Health with the support of the Government of the Republic of Uzbekistan launched a full-scale healthcare reform aimed to increase access of the population to high-quality, effective, and safe medical care. The key areas of the healthcare reform included • the introduction of new approaches to the structuring of the healthcare system and the development of its infrastructure to ensure equal access of the population to free primary healthcare both in urban and rural areas • the introduction of new conceptual and practical approaches towards mother and child health aiming to provide safe conditions for giving birth and nurturing a healthy generation • the implementation of a new comprehensive system of emergency care at all administrative and territorial levels • the significant increase of funding for the health sector through, inter alia, the development of fee-based and private healthcare • the improved use and allocation of funding, primarily by channeling more budgetary funds to the primary healthcare level, thus, to outpatient and polyclinic health services including preventative care as an alternative to the ineffective use of expensive hospital beds

Today, an integrated healthcare system operates in the Republic of Uzbekistan, which encompasses public, private, and other healthcare services. The organizational setup of the healthcare system is shown in [Figure 2-7].

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 129 Effectiveness in the Republic of Uzbekistan [Figure 2-7] The Organizatoinal Set Up of the Healthcare System

Ministry of Health of the Republic of Uzbedistan

Republican Republican Republican SRI, IHE, Institute of Blood Banking Republican Center for State Center for Speciallized Republican Health and Republican AIDS at SRI of Health Care Sanitary and Emergency Medical Facilities Centers and ISSE Medical Statistics Center Hematology and Facilities (29) Epidemiological Care (10) (95) and its Branches Blood Transfusion Surveillance

Health Care Departments of Regions and the city of Tashkent Ministry of Health of the Republic of Karakalpakstan (14)

Regional Regional Regional Branch Regional Regional Multi- Specialized Regional Medical Regional Blood Center for State of the Republican Pediatric Multi- Regional AIDS Profile Medical Hospitals, Diagnostics Transfusion Sanitary and Center for Profile Medical Center Center Maternity Clinics, Center Station Epidemiological Emergency Care Center (14) (13) Dispensaries (14) (16) Surveillance (12) (13) (217) (14)

District (City) Medical Association (Central District (City) District (City) Center for State Multi-Profile Polyclinic, Central District (City) Hospital with Sanitary and anEmergency Care Unit (197) Epidemiological Surveillance (198) Rural medical facilities, family polyclinics (in urban areas), midwifery complexes, specialized hospitals and dispensaries

Private Medical Facilities

Source: Ministry of Health.

Over the course of the reforms, the Ministry of Health along with other ministries, agencies, and nongovernmental organizations implemented a number of programs in the following areas: improved reproductive health, maternal and child health screening, development of continuing medical education and professional development, raising public awareness in the field of reproductive health, medical ethics, expansion of international cooperation to improve women’s reproductive health, birth and upbringing of children, and the refurbishment and improved equipment at maternity and children’s facilities.

Primary healthcare was central to the implementation of the aforementioned national programs with positive results and outcomes for maternal and child health. The coverage of women with contraceptives increased from 13.0% in 1991 to 52.1% in 2011. Infant mortality decreased from 35.5 per 1,000 live births in 1991 to 10.2 in 2012. Maternal mortality declined from 65.3 per 100,000 live births in 1991 to 21.2 in 2012. In the healthcare delivery system, the primary care services are supplied mainly by public health facilities, clinics, and private outpatient clinics. In particular, rural area residents have to consult a physician at a rural physician post (formerly feldsher—midwifery posts), and then they can visit outpatient clinics of district (oblast) hospitals or multi-specialty outpatient units if necessary. The residents in urban areas, however, can use primary and secondary care services

130 • 2015/16 Knowledge Sharing Program with Uzbekistan provided by the specialists at the family polyclinics for all groups of the urban population, which were previously separated and mainly specialized in women’s health. Additionally, the gradual replacement of specialists with GPs will take place in the future. At the regional level, a variety of diseases and different population groups are treated separately at medical institutions with corresponding diseases and treatments.

Through an array of health reforms, emergency care services have organized and established a network of emergency departments at all levels including local, regional, and national. The health reforms made it possible for the entire population in Uzbekistan to have free access to emergency care and presumably led to an overload of emergency care services in terms of expenditures on equipment, medical aids, and medications.

There is no good evidence that proves that quality and performance evaluations are conducted on a regular basis in Uzbekistan. The evaluation scheme for medical service quality and performance is mainly used by public facilities and focuses mostly on the structural aspects of the healthcare system, not the health outcomes. Furthermore, the evaluations on the healthcare process have never been conducted. Under the supervision of the Ministry of Health in Uzbekistan, the agencies have undergone structural evaluations on the health facilities and equipment in the public healthcare field. In fact, it is not clear whether the outcome measures were collected and are available and if eventually there would be feedback on the facilities monitored for quality improvement.

The pharmaceutical sector in Uzbekistan, however, has now been completely privatized. Uzbekistan adopted a long-term strategy to fully satisfy the needs of drugs in essential and important indications and the needs of blood products to overcome a chronic dependency on expensive drugs mostly imported from the multi-national pharmaceutical enterprises and purchased with an assistance of grant aid from World Bank and/or developed countries.

Several major health reforms aimed to improve the quality of healthcare provision, governance, and financing observed the training of GPs and the financing the primary care based on capitation.

Despite the limited availability of data on the healthcare system and its performance through a series of health reforms, Uzbekistan has made great efforts to improve the efficiency and effectiveness of the healthcare system, provide equal accessibility to healthcare facilities, and protect the vulnerable population from catastrophic financial disaster due to illness. The significant share of out-of-pocket medical costs, along with the healthcare packages with limited benefit boundaries

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 131 Effectiveness in the Republic of Uzbekistan such as primary and emergency care only, may still have a detrimental effect on health outcomes.

In terms financing, the WHO report identifies that “the 1996 Law on Health Protection defined a basic benefit package to be funded by the state, which includes primary care, emergency care, care for ‘socially significant and hazardous’ conditions, and specialized care for groups of the population classified by the government as vulnerable.”9) The MOF is in charge of pooling and allocating public funding for healthcare. The Uzbekistan government takes the responsibility for financing of specialized medical centers, emergency care centers, and republican- level medical institutions, while local governments are responsible for hospitals in different categories such as primary health clinics. Workers in the public medical sector get paid on a salary basis set up with the strict guidelines.

Compared with USD 3,852 of the EU member countries, the WHO report estimates the total national health expenditure (NHE) per capita of Uzbekistan was USD 221 in 2012.10) The total NHE accounted for 5.9% of the 2012 GDP, of which the share was quite low compared with most EU countries but still high among the countries in central Asia. Around 54% of NHE comes from public sources through taxation, while the remaining 46% comes from private OOP payments. Voluntary health insurance is a very small portion of NHE in Uzbekistan. The funding from the public sector is mainly supported by the state budget and strictly obeys the budget expenditure protocols designed by MOF. Since 2007, when a treasury system was first adopted in Uzbekistan, the Treasury Office has held the state funds for health facilities at various levels.11) Drugs and any pharmaceutical provision within the corresponding inpatient care period are covered, while those for outpatient cases are not. The patient groups who are eligible for free outpatient drugs are defined by the Cabinet of Ministers of Uzbekistan government.12) Recently, the Uzbekistan government initiated self-financing through a user fee mechanism for the tertiary care services from state budgeting.

Cost sharing through copayment does not exist in the health system of Uzbekistan, while a variety of cost-sharing types are presumed to be introduced and adopted in the voluntary health insurance system.

9) Ahmedov et al. Health Systems in Transition. WHO. 2014. 10) WHO. Regional office for Europe. 2014. 11) President of Uzbekistan. Presidential Decree 594 of 28 February 2007. Tashkent. Republic of Uzbekistan. 2007. 12) There are a) seven disease groups (cancer, endocrinological and mental conditions, tuberculosis, leprosy, HIV/AIDS, and postoperative states related to cardiac interventions and transplantations) and b) six population groups related to social services, labor front, WWII, Chernobyl accidents, and participants in international wars, retired veterans (Cabinet of Ministers. Decree No. 532 on the improvement of financing mechanisms of health care delivery institutions, 2 December 1997).

132 • 2015/16 Knowledge Sharing Program with Uzbekistan

State Budget Expenditures to Develop Healthcare for Selected Years (2000–2015) (Unit: billion soms, %) Indicators 2000 2005 2010 2015 Capacity of GDP 3,194.5 15,210.4 61,831.2 175,537.0 Total state budget expenses 942.7 3,420.1 13,386.9 37,967.7 Total of expenses to healthcare 81.9 362.9 1,716.5 4,708.9 (without reconstruction fund) Including hospital section 56.1 237.8 989.3 2,698.0 Outpatient section 15.1 76.8 492.3 1,501.8 Others 10.6 48.3 234.9 509.2 State budget expenditure 29.5 22.5 21.7 21.6 share of GDP Healthcare expenditure share 8.69 10.6 12.8 12.4 of the total state budget Hospital section expenditure share 68.6 65.5 57.6 57.3 of healthcare expenditures Outpatient section expenditure 18.4 21.2 28.7 31.9 share of healthcare expenditures

Source: Ministry of Finance (with authors' calculation).

State Healthcare Budgets for Health Manpower (Unit: billion soms, %) 2010 2011 2012 2013 2014

Healthcare total 1,720.5 2,227.2 2,762.4 3,402.3 4,109.3 Salary and other 1,188.6 1,544.6 1,926.1 2,364.9 2,781.8 expenses equal to salary Share of healthcare 69.1 69.4 69.7 69.5 67.7 budget

Source: Ministry of Finance (with authors' calculation).

In parallel to the reform efforts in primary healthcare, Uzbekistan established a national model for emergency care. Over a transitional period, the emergency care system was centralized and is now coordinated solely by the Republican Scientific Centre of Emergency Care, which has branches in all regions. In addition, the central district and city hospitals set up emergency care units in the country’s 171 locations. The advantages of this organization as compared to its pre-reform arrangement

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 133 Effectiveness in the Republic of Uzbekistan include that highly qualified specialists are concentrated under one umbrella to help patients in need of emergency medical care. Specialized secondary and tertiary care have also been reformed, including the introduction of new medical technologies. They are now available at scientific research institutes and specialized scientific and practical republican health centers, which are developing new medical technologies and national standards for quality of care. They also introduce achievements of global medicine into the domestic healthcare practice.

Overall, primary healthcare remains at the core of the healthcare system development in order to ensure equal rights, social fairness, universal access, and full coverage of the population with free primary care services. Accordingly, the introduction of general practice and family medicine is an inalienable element of primary healthcare reforms.

In recent years, Uzbekistan has achieved notable progress in structural reforms of primary healthcare. There are, however, still unresolved problems with regard to key primary care functions. There is still inadequate delivery of preventive and family medicine services, weak continuity of care and coordination with other levels of care, including an effective patient referral system, as well as the efficient use of financial resources.

The regular evaluation and analysis of effectiveness and efficiency play an increasingly important role in the healthcare reform. Findings from evaluations are essential for the public health administration to make evidence-based decisions and, thus, to achieve better results. Moreover, demographic and epidemiological changes now demand the healthcare systems to adapt to the new public health challenges. This requires the evaluation of responses from patient-oriented medical services. In this sense, the budgeting scheme for hospitals especially needs to be reconsidered as the current basis of the number of beds and health manpower. Many hospitals in Korea have adopted a so-called “key performance index” based on the balanced scorecard , a strategic planning and management system in many fields including industry and government. To improve the budgeting mechanism for better effectiveness, it needs to reflect hospital performance such as bed occupancy rates, increase of inpatients and outpatients, number and increase of complications and medical malpractice, and user satisfaction level. So far, there is no well- established monitoring and evaluation scheme for medical malpractice, medical treatment, and drug safety issues. In addition, there is no organization or agency specialized in patient safety monitoring or quality of care along with policies for clear compensation mechanisms.

In parallel to the reform efforts in primary healthcare, Uzbekistan established a national model for emergency care. Over a transitional period, the emergency care

134 • 2015/16 Knowledge Sharing Program with Uzbekistan system was centralized and is now coordinated solely by the Republican Scientific Centre of Emergency Care, which has branches in all regions. In addition, the central district and city hospitals set up emergency care units in the country’s 171 locations. The advantages of this organization as compared to its pre-reform arrangement include that highly qualified specialists are concentrated under one umbrella to help patients in need of emergency medical care. Specialized secondary and tertiary care have also been reformed, including the introduction of new medical technologies. They are now available at scientific research institutes and specialized scientific and practical republican health centers, which are developing new medical technologies and national standards for quality of care. They also introduce achievements of global medicine into the domestic healthcare practice.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 135 Effectiveness in the Republic of Uzbekistan clear compensation mechanisms.

The analytical review of the current primary healthcare reforms in Uzbekistan is especially relevant because it will contribute to opening a dialogue between governmental, nongovernmental, and international organizations to enable the elaboration of further strategies for the development of primary healthcare in a global and changing world.

5. Policy Suggestions and Conclusions

As described in Sec. 2, the Korean government faced a devastating crisis in 1997, which was termed “Asian Financial Crisis” that had a deep impact on the Korean economy. Accordingly, the Korean government initiated bold and decisive structural reforms in its budget system to resolve the root causes of the crisis and to invigorate the economy. The major focus of budgetary reforms in Korea was the adoption of a series of initiatives for strengthening budget management. Under the NFMP initiated in 2004, all the government budgets were controlled for the purpose of 1) stabilizing the macroeconomic situation over the mid-term period, 2) efficiently and strategically allocating the limited resources, and 3) pursuing a predictable and stable supply of budget to line ministries. Additionally, the TPCM aims to improve the efficiency of fiscal spending through reasonable adjustment and total project cost management of large-scale projects funded by the National Treasury in each stage of project implementation. Currently, TPCM is conducted on projects lasting more than two years and costing over 50 billion won (or the cost of construction higher than 20 billion won). In a similar sense, though it is not currently adopted in Korea’s budget process, the global budgeting can be adopted to manage and control the budget and its related activities of the line ministries intensively and efficiently. Since over 67% of the state healthcare budget is spent on healthcare manpower such as medical doctors, nurses, and medical technicians (i.e., salary and other expenses equal to salary), it would be obvious to check for any possible points where budget leakage occurs. Because of much difficulty identifying the productivity of healthcare manpower, especially in the public health sector, global budgeting can be a sledgehammer that strictly forces all budget parts to be operated with the highest level of efficiency.

Under the old budget system, it was difficult to understand the detailed content of projects, and fraud, waste, and misuse were not easily noticed as a result. Moreover, performance was not thoroughly evaluated, and the budget was considered as a blueprint only for the central budget agency. To fix the shortcomings, PMS was introduced in 2004 with three components: 1) PGMS, 2) FPAS, and 3) IAS. All of these are designed to evaluate the ex post performance

136 • 2015/16 Knowledge Sharing Program with Uzbekistan and then plan and determine the budget amount of the line ministries for the following fiscal year. These are collectively called “performance-based budgeting.” If the Uzbekistan government is contemplating introducing universal health insurance in the future, adopting the global budgeting and performance-based budgeting would also be recommended to achieve the highest level of efficiency and effectiveness of policy implementation.

In Uzbekistan, resource allocation in the healthcare field is not informed by the systematic and comprehensive evaluations and monitoring schemes, and the adoption of “state-of-the-art” methods such as cost-effectiveness analysis and comparative studies in policy implementation is quite limited. Therefore, it has been found that the resource allocation in the public health sector has followed a government-planned process based on the established geographical and population standards and protocols. As discussed above, financing of primary, secondary, and tertiary inpatient care services is still based on input such as the number of beds and manpower and the medical expenditures in the preceding years. Though the health output produced is more important, the mode of financing does not include it due to several presumable issues and limitations. However, the recent shift from state budgeting to self-financing can concern the possible behavioral changes in health organizations. In order to protect the major revenue sources, medical institutions are expected to induce service duplication such as laboratory tests and medical procedures and, furthermore, inappropriate hospitalizations and drug prescriptions that may result in pharmaceutical overuse.

After Uzbekistan’s independence in 1991, the country has observed two initiatives that led to increased technical efficiency in the healthcare field. By adopting a formal user fee mechanism, the demand for healthcare services declined due to less affordability, and by implementing new treatment protocols, the number of inpatient cases and average length of stay have declined. While the impact in the primary care sector is unclear, the shift from state budgeting to self- financing in the secondary and tertiary care sectors, however, is expected to result in reduced technical efficiency when the institutions intentionally increase bed occupancy rates to achieve higher revenues.13)

It is well known that the medical institutions and hospitals operated in central Asia, most of which were parts of the former Soviet Union, are now paid on a global budgeting basis or on the number of cases treated.14) Currently in Uzbekistan, some pilot tests are being conducted for new hospital financing

13) Expert-Fikri. Health II-Final Evaluation Report. Tashkent, Expert-Fikri. 2011. 14) Fuenzalida-Puelma et al. Purchasing of Health Care Services. In J. Kutzin, C. Cashin, and B. Jakab, eds. Implementing Health Financing Reform: Lessons from Countries in Transition. Copenhagen, World Health Organization: 155–186. 2010.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 137 Effectiveness in the Republic of Uzbekistan mechanisms such as DRGs and global budgeting.

Last but not least, the health data availability and accessibility is one of the most crucial issues. Lack of appropriate data is a major hurdle in assessing and evaluating the performance of the health system and policies in Uzbekistan. To government agencies and their equivalent research groups, construction of clear and well-established data sets and their public access is urgently needed, but public transparency does not seem to be in effect. In Uzbekistan, interestingly enough, most of the micro-level measures and data are primarily incorporated in the system and quantified to be aggregate measures, such as morbidity or mortality rates. It is doubtful whether the data collection frameworks exist in Uzbekistan. Furthermore, the evidence-based decision-making process is required in policy setting and budget processes. There is a strong belief that reliable and verifiable data sets would be an information asset for quality research output, and they become critical to improve transparency and effective policy design.

138 • 2015/16 Knowledge Sharing Program with Uzbekistan References

Ahmedov et al. Health Systems in Transition. WHO. 2014. Asadov and Aripov. The Quality of Care in Post-Soviet Uzbekistan: Are Health Reforms and International Efforts Succeeding? Public Health, 123(11):725–728. 2009. Cabinet of Ministers. Decree No. 532 on the Improvement of Financing Mechanisms of Health Care Delivery Institutions, 2 December 1997. Chung. Innovation, Competitiveness, and Growth: Korean Experiences. 2011. Expert-Fikri. Health II-Final Evaluation Report. Tashkent, Expert-Fikri. 2011. Fuenzalida-Puelma et al. Purchasing of Health Care Services. In J. Kutzin, C. Cashin, and B. Jakab, eds. Implementing Health Financing Reform: Lessons from Countries in Transition. Copenhagen, World Health Organization: 155–186. 2010. Mitchell and Thurmaier. Currents and Undercurrents in Budgeting Theory: Exploring the Swirls and Heading Upstream. 2010. OECD. Principles of Budgetary Governance. 2014. President of Uzbekistan. Presidential Decree 594 of 28 February 2007. Tashkent. Republic of Uzbekistan. 2007. Rajaram et al. The Power of Public Investment Management: Transforming Resources into Assets for Growth. World Bank. 2014. Rubin. Budgeting for Accountability: Municipal Budgeting for the 1990s. 1996. Schick. Planning-Programming-Budgeting System: A Symposium. 1996. Yu. Legal Basis of the Budget in Korea. 2002. WHO. Regional office for Europe. 2014.

Chapter 2 _Development of a Strategy to Improve the Healthcare Budget Process and Budget Expenditure • 139 Effectiveness in the Republic of Uzbekistan

2015/16 Knowledge Sharing Program with Uzbekistan: Supporting Uzbekistan’s Development Strategy in Key Policy Areas: Special Economic Zone, Industrial Development, Chapter 3 Public Budgeting and Postgraduate Education

Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile Industry Strategy in Uzbekistan

1. Introduction 2. A Brief Introduction to the Textile Industry 3. Uzbekistan’s Textile Industry 4. Korea’s Experience in Textile Industry Developmentn 5. Implications of Korea’s Experiences and Policy Recommendations ■ Chapter 03

Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile Industry Strategy in Uzbekistan

Jong Il Kim (Dongguk University) Zulfiya Asfandiyarova (Institute of Forecasting and Macroeconomic Research) Sanjar Karimov (Institute of Forecasting and Macroeconomic Research)

Summary

The textile industry is important for the economic development of Uzbekistan, which produces and exports large amounts of cotton but processes a small share of cotton within the country. To develop the textile industry, Uzbekistan should extend the cotton textile industry’s local value chain based on its rich cotton production. Compared with Korea’s experience in textile industry development, which started from the downstream and shifted toward upstream industries, the direction of Uzbekistan’s textile industry development is the other way around: from the upstream to the downstream.

Although the circumstances faced by Uzbekistan in its textile industry development are different from Korea’s, Korea’s experience can provide important lessons for Uzbekistan. The success of Korea’s textile industry lies in its continuous extension of a local value chain following signals from export markets. The government’s role in developing the textile industry was facilitating the local textile firms in Korea to find business opportunities in clothing exportation first, followed by synthetic fabrics, and later by raw materials for the textile industry. Exports have been the top priority of policymaking since the 1960s. Therefore, the policy to promote the textile industry should focus on providing a favorable business environment for local textile firms in Uzbekistan, including foreign- invested firms, and jointly discovering business opportunities along the textile industry value chain.

142 • 2015/16 Knowledge Sharing Program with Uzbekistan From Korea’s experience, we list what the Uzbek government should do as follows. First of all, more active invitation of foreign direct investment is required to increase the local cotton fiber processing. Attracting more spinning firms to the country could be an immediate policy target. In the long run, it is critical to attract midstream weaving firms, which are important to strengthen the local textile industrial linkage. Along with attracting foreign investment, it is more important to create many competitive domestic firms in the mid- and downstream textile industries. For this, the government should first provide a more favorable business environment for conducting business in Uzbekistan. This requires reform of foreign exchange policy, which is not easy without the determination of the top political leadership.

Second, to extend the local value chain, the government should remove anti- local production bias in Uzbekistan. The current cotton distribution system and the cotton price set by the government do not provide a comparative advantage to the cotton textile manufacturers located in Uzbekistan. A more market- oriented cotton distribution system should be introduced gradually, although it is not an easy task again without political determination. For the time being, it may be necessary to incentivize the local textile production by supplying cotton at a more discounted rate. In addition, it is necessary to reform the tax system that is inconsistent with textile industry development. The VAT refund system should be extended to products sold to local downstream manufactures. At least the products sold to local downstream export producers should be covered by the system. This requires a more efficient administrative process so that the refund could be automatic and immediate. Next, the high import duties on materials not produced in Uzbekistan, such as synthetic fibers, accessories, and auxiliary materials, should be lowered or exempted at least for export production. To facilitate this, it may be necessary to establish the export processing zone for the textile industry.

Third, along with removing anti-local production bias, more attention should be paid to the policy for exports of the mid- and downstream textile industries. For this, it is critical to hear the autonomous bottom-up demand-driven voice channels from the business fields. Although O’zbekyengilsanoat plays the role of the textile industry manufacturers’ representative, an organization needs to be established that is separate from the government’s bureaucratic system and assigned the special task of export promotion with a close relationship to the business sector.

Fourth, it is critical to facilitate the access to capital for local manufacturers. The access to long-term credit that is necessary for re-equipping the textile

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 143 Industry Strategy in Uzbekistan industry and export credit that provides working capital is reported to be a major obstacle for expansion of local firms. For this, it may be necessary to set up a fund that targets credit expansion for the textile industry, particularly, local weaving firms. However, it is important that the fund be installed after the establishment of a responsible and able organization to manage the fund.

Fifth, the government could increase its assistance for firm-level improvement of equipment maintenance by facilitating the training of technicians and engineers and technological advances in processing products such as dyeing and finishing. This requires upgrading textile education institutes and international cooperation.

Finally, the development of timely, accurate, and comprehensible data on Uzbekistan’s textile industry is necessary. Without acquiring accurate information on the industry’s situation, it is impossible to set up effective policies.

1. Introduction

Even with the recent crisis, Uzbekistan has shown stable and high GDP growth of approximately 8% over the last decade.1) This strong economic performance could be attributable to increases in commodity exports such as gold and gas and prudent macroeconomic policies such as sound fiscal management. The national debt has been well managed with the ratio of public debt and external debt to GDP staying at sustainable levels of approximately 10% and 20%, respectively.2) Uzbekistan maintained positive account balances by abstaining from foreign borrowing and strictly controlling foreign exchange transactions.

Because of the government’s pursuit of active industrial policy since its independence, the share of industrial production in GDP increased from 14.2% in 2000 to 24.1% in 2014.3) As a result, the export structure changed substantially. While the export share of cotton fiber decreased to less than 8% in 2014 from around 60% in 1990, energy-related products (26% in 2014), transportation and construction services (22%), foodstuffs (12%), metals (7%), chemical products (4.6%), and machinery/equipment (4%) increased their shares in export.4)

The above macroeconomic indicators imply that Uzbekistan’s economy was successful in overcoming the challenge of transitioning from the Soviet system

1) For the recent economic performance of Uzbekistan, see Siwook Lee et al. (2014). 2) See Bendini (2013). 3) The figures are from Leeet al. (2014). 4) The figures are from Fig. 1-1 of Siwook Leeet al. (2014).

144 • 2015/16 Knowledge Sharing Program with Uzbekistan and transforming its economy into a more diversified one with an expanding modern industrial sector. However, Uzbekistan is still classified as a lower- middle-income country with GDP per capita at USD 2,038 with a large poor rural population. Uzbekistan remains poor among the former Soviet Union republics along with Tajikistan and Kyrgyzstan. Uzbekistan has a large rural population, approximately 63.7% of the total population in 2014, and the poverty rate is high at approximately 28% in 2012.5) Thus, the agricultural sector employs about 40% of the economically active population, while it produces the one-fifth of the GDP. Uzbekistan’s agriculture is still dominated by cotton production along with wheat agriculture, although cotton production has declined by more than 30% since the early 1990s.

Therefore, to grow into an upper-income country and reduce poverty, Uzbekistan should transform its economic structure by creating growth engines in industries and services. The government of Uzbekistan considers industrial diversification and modernization as a top policy priority and expects that the textile industry will play an important role. The Industrial Modernization and Development Program for 2011–15 also picked the textile industry as a strategic industry.6)

Considering Uzbekistan’s current situation, it is without saying that Uzbekistan should extend the length of the local value chain in the textile industry. First of all, Uzbekistan is rich in cotton fibers, a large share of which is exported abroad. Uzbekistan is the sixth largest global cotton producer and the fifth largest cotton supplier for world markets. According to

, India, the top cotton producer in the world, consumes more than 80% of the production domestically. However, Uzbekistan exports more than 60% of its cotton abroad, which implies that Uzbekistan does not have an active forward-industrial linkage of cotton as India does. This implies that Uzbekistan has potential to extend the value chain of the textile industry by taking advantage of its abundant cotton. Although natural fiber was replaced by synthetic fiber over a long time, cotton still accounts for approximately 30% of the world’s apparel fiber consumption.7)

5) The web DB of the World Development Indicator as of Feb. 22, 2016. 6) The program consisted of 519 large investment projects with a total of USD 47.3 billion. 7) International Cotton Advisory Committee (2013).

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 145 Industry Strategy in Uzbekistan

World Top Ten Cotton Producers and Exporters (2014/2015) (Unit: million 480 lb. bales) Production Exports

1 India 29.5 United States 11.2

2 China 30.0 India 4.2

3 United States 16.3 Brazil 3.9

4 Pakistan 10.6 Australia 2.4

5 Brazil 7.0 Uzbekistan 2.5

6 Uzbekistan 3.9 Burkina Faso 1.1

7 Turkey 3.2 Mali 0.8

8 Australia 2.3 Turkmenistan 1.5

9 Turkmenistan 1.5 Greece 1.2

10 Burkina Faso 1.4 Cote d'ivoire 0.9

Source: Cotton Incorporated (2016).

In addition, Uzbekistan is the most populous country in Central Asia with a relatively low wage level. With a large poor rural population that produces commodities such as cotton and wheat, it is critical to move these low-value- adding workers to higher-value-adding industries as the classical theory of development by Lewis (1954) indicates. It again implies the potential of the textile industry, which could create more jobs than the energy-related and heavy industries. Uzbekistan also shares a common border with all other former Central Asian Soviet republics and has a long history of economic connection with populous Russia. The recent increase of textile exports to Russia also indicates that the textile industry’s development could bring in more hard currency to Uzbekistan if it shifts the center of export from cotton to processed textile products.

According to the study of Haraguchi and Rezonja (2010) who explored the patterns of manufacturing across countries with different income levels, the manufacturing share grows until the income of a country reaches more than USD 10,000 (2005 constant prices). They found that the development pattern of the textile and apparel industry was based on the changes in the GDP share as the GDP per capita changed. During the early stage of development, textiles’ importance increases regardless of country size, while small countries are more likely to increase the share of apparel more than large ones. The share of the

146 • 2015/16 Knowledge Sharing Program with Uzbekistan textile industry’s GDP tends to increase rapidly until the country’s income reaches approximately USD 3,000 and remains high even after the country’s income increases to more than USD 100,000. Considering the current level of Uzbekistan’s GDP, which is around USD 2,000, the textile industry should play a central role in boosting economic growth for the time being.

Therefore, it is natural that Uzbekistan’s government considers the textile industry as an important sector. Recently, the government tried to promote the textile industry, and the share of cotton production used for domestic processing has increased since 2005 while the cotton production declined steadily. This is mainly attributable to joint ventures between the state and foreign investors that target the foreign market. Most domestically operated establishments purchase cotton fibers that are lower in quality than the exported and manufactured cotton yarn. These spinning mills add relatively lower value to the textile industry’s value chain, and they are capital intensive. It again implies that there is large room for Uzbekistan’s textile industry to develop by increasing local cotton processing and diversifying industries.

[Figure 3-1] Uzbekistan’s Cotton Consumption, Exports, and Production (Unit: 1,000 bales) 9,000

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

1991/921992/931993/941994/951995/961996/971997/981998/991999/002000/012001/022002/032003/042004/052005/062006/072007/082008/092009/102010/112011/122012/132013/142014/15

Domestic Consumption Exports Production and Beginning Stocks

Source: USDA, Foreign Agricultural Service, Production, Supply and Distribution Online data, 2015. Quoted from Golub and Kestelman (2015).

Based on its potential, the Uzbek textile industry’s underachievement could be explained by the disadvantages it faces. Uzbekistan is a landlocked country, which makes external trade difficult and more expensive. Moreover, it is surrounded by landlocked countries, so called double landlocked. In addition, Uzbekistan still suffers from the legacy of the Soviet system and needs more reform toward

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 147 Industry Strategy in Uzbekistan a market-oriented system. Particularly, the state-controlled system for cotton and tight foreign exchange control severely distort the incentive system for the stakeholders in the textile industry, which is a major growth engine in a market economy.8)

In this report, we explore what Uzbekistan should do to develop its textile industry based on Korea’s experience, which exploited the textile industry as a stepping-stone in the initial period of economic development in the 1960s and 1970s. This report does not intend to provide a specific and detailed strategic development plan for the textile industry, and it does not cover the engineering or technological roadmaps. Korea’s experience may not help Uzbekistan much in choosing a specific strategic plan or picking a promising export item because the industrial environment dramatically changed over the last several decades since Korea’s textile industry boomed. Instead, this report tries to find the success factors of Korea’s textile industry development in terms of structural change of the textile industry and government policy and suggest the desirable direction the government of Uzbekistan should follow to be successful in promoting its textile industry development.

In the next section, we briefly introduce the critical development factors for the development of the textile industry. We examine the textile industry’s product lineup, production process, industrial linkage, and innovation process. In Sec. 3, we provide an overview of the textile industry’s current situation and government policy in Uzbekistan. We provide the important indicators of textile production and analyze the SWOT of the Uzbek textile industry. We also present the existing strategy for the textile industry’s development and the policy framework. In Sec. 4, we provide an overview of Korea’s experience in developing its textile industry. Here we discuss the role of the textile industry in Korea’s economic development and the important policies implemented by the Korean government. Finally, in Sec. 5, we give the success factors for Korea’s textile industry development and suggest what Korea’s experience implies for Uzbekistan.

8) There are many studies on the problem of state-controlled cotton production such as McDonald (2012), Muradov and Ilkhamov (2014), and Golub and Kestelman (2015), to name a few.

148 • 2015/16 Knowledge Sharing Program with Uzbekistan 2. A Brief Introduction to the Textile Industry

2.1. Textile Industry Characteristics

The textile industry is a group of industries that uses natural (cotton, wool, etc.) and synthetic fibers to produce fabric. In a broad sense, the textile industry includes the apparel industry and produces yarn, fabric, and clothing and handles their distribution. The demand for textile products continuously grows with increasing per capita textile consumption. The top textile exporters are countries with different income levels such as China, the European Union, India, Turkey, the U.S., and Bangladesh, which implies an international division of production as well as market segmentation by quality and price.

The textile industry includes a variety of products with high differentiation in textile materials (natural and manmade), processes (woven, knitted, and felt), and final usage (clothing and industrial). The textile industry has been closely linked with other industries such as textile machinery and textile chemicals and now increases its linkage with high-technology industries such as information, bio-, and nanotechnology. The apparel industry itself is an integrated industry including fashion-related products such as various kinds of accessories and related materials.

The textile industry’s production process stretches over the value chain stream, from textile materials (cotton, chemicals) to final products (clothes), consisting of functions such as spinning, weaving, knitting, dyeing, and sewing, as shown in [Figure 3-1]. The upstream (textile materials and yarns) is capital intensive and usually operated by large companies. The upstream companies producing natural fiber are closely linked with the agricultural sector, while those of synthetic fiber have a strong linkage with the chemical industries and are more capital and technology intensive. The midstream (fabrics, dyeing, and finishing) and downstream (sewing) are less capital intensive and usually operated by small and medium companies. From a technical perspective, the productivity of upstream companies is determined by the machine performance and textile material procurement. The downstream process is labor intensive, and its productivity is determined by the skilled workers and labor intensity. It is usually located in a region where a large number of low-wage workers are available.

The downstream process is usually dominated by the buyers who know where the demands for the final textile products are. The closer to the consumers, the more critical designing, branding, and marketing are in deciding profits. Usually, the buyers are a small number of leading companies in developed countries and

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 149 Industry Strategy in Uzbekistan govern the textile industry’s downstream production (apparel manufacturing) networks. The value-added profile along the value chain from R&D, design, purchasing, manufacturing, distribution, and marketing looks like a smile curve with the lowest value added in manufacturing.

[Figure 3-2] Apparel Value Chain

Prooduction Distribution and Sales Upstream Middlestream Downstream

TEXTILE COMPANIES APPAREL MANUFACTURERS North America All Retail Outlets Cotton, Wool, Yarn Fabric U.S Garment Factories Department Stores Silk, etc. (Spinning) (weaving, knitting, (designing, cutting, sewing, finishing) buttonholing, ironing)

Domestic and Mexican/ Brand-Named Specialty Stores Caribbean Basin Subcontractors Apparel Companies

Mass Merchandise Asia Chains

Overseas Oil, Natural Gas Petrochemicals Synthetic Fibers Asia Garment Contractors Buying Discount Chains Offices

Domestic and Overseas Subcontractors Trading Companies Off-Price, Factory Outlet, Mail Order, Others All Retail Outlets

COMPONENT PRODUCTION EXPORT MARKETING NETWORKS NETWORKS NETWORKD NETWORKD

Source: Fernandez-Stark, Frederick, and Gereffi (2011).

2.2. Textile Industry Global Value Chain

With advancements in information and transportation technology, apparel production has been globalized as the competition between the leading firms results in developing extensive global sourcing. The labor-intensive process was transferred to the firms in low-wage regions, while the leading firms concentrated on designing and marketing. To participate in the global value chain, the firms in developing countries should attract the large leading firms governing the global value chain with low labor or material costs and short delivery times, which includes rapid and reliable transport networks and short customs clearance times. With accumulated knowledge, the firms in developing countries upgrade in various ways such as process upgrades, product upgrades, functional upgrades (moving up the value chain and taking on new high-value-

150 • 2015/16 Knowledge Sharing Program with Uzbekistan adding functions), and intersectoral upgrades.9)

Usually, the producers in developing countries start with CMT (cut, make, and trim) activities and proceed to original equipment manufacturing (OEM) by taking responsibility for finishing as well as CMT activities. For this, the firm should acquire upstream logistic capabilities (procuring the necessary raw materials and financing). The firms of OEM capability gradually add designing to the production and become original design manufacturing (ODM) producers. When the ODM producers focus on branding and distribution with own-brand products, they become original brand manufacturing (OBM) producers. The evolution of the downstream producers in developing countries is the process of widening the range of the value chain and increasing the amount of value created within the national border and is itself the development of the textile industry in developing countries. At the same time, some developing countries experience the development of industries linked with these downstream process, as business opportunities are created for local upstream production.10)

As mentioned, the entry barriers to join the global value chain arise from the particular requirements set by the buyers (the leading firms in developed countries) in terms of product quality, production volume capacity, compliance with standards, and lead times. Buyers’ sourcing patterns are sensitive to the distance from the final markets to the sources and the trade preferences between the countries where the sources are located and major export markets.

Along with globalization over the last 30 years, foreign direct investment (FDI) has played a central role in spurring the textile industry’s evolution in developing countries. The downstream producers in emerging countries such as Turkey and South Korea moved their plants abroad as their wage level rose. This was followed by the mid- and upstream producers. As a host developing country, the political and economic environment including administrative red tape and fiscal incentives becomes critical to attract FDI. In addition, the physical infrastructure of information and transportation and the institutional arrangement related to transparency and predictability of trade and doing business matter much.

2.3. Recent Evolution of the Textile Industry

After 2005 as the Multi-Fiber Arrangement(MFA) phased out, the apparel industry’s global value chains consolidated into fewer leading apparel exporting countries where there were larger suppliers who were more capable in

9) Kaplinsky and Morris (2000). 10) Fernandez-Stark et al. (2011).

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 151 Industry Strategy in Uzbekistan strategically located regions11) such as China, Bangladesh, and Vietnam with low labor costs, network competences, and transport and administrative efficiencies. The large leading countries concentrate their order with fewer producers in developing countries and ask them to manage the local production network at the ODM level. In addition, the recent advance of fast fashion required designers and manufacturers to respond quickly to market trends at a lower price, which accelerated the consolidation of apparel manufacturing.

Recently, with rapidly rising income in emerging countries such as China and a shrinking demand in developed economies, the emerging countries such as China, India, Russia, and South Africa became a significant new market for nearby developing countries. This provides new opportunities for low-income countries to compete against dominant producers in China and India.12) However, the opportunities are given to the firms that can meet the requirement set by the buyers that dominate the distribution networks. The buyers increased their presence with a more active role in quality control and improved working conditions.

As production is consolidated into a few producers, the failure in quality control could result in critical damage to the business. Thus, the buyers push the producers to upgrade by requesting additional competences as well as lengthening the range of producers in the value chain. In addition, with increasing information flows across borders, the countries’ and firms’ image becomes more and more important. In particular, the working conditions in factories that employ young female workers sensitively influence the total brand image of leading buyers.

As a result, the apparel manufacturers that concentrate on a specific region with favorable conditions give birth to industrial clusters as companies, suppliers, service providers, and associated institutions in the textile industry agglomerate. The firms not only compete with each other, they also cooperate to overcome common challenges such as a lack of infrastructure, technological bottlenecks, and limited access to capital.

2.4. Cotton Textile Industry Value Chain

Finally, we discuss the cotton textile industry because it is considered as the basis of Uzbekistan’s textile industry development, and it should utilize the comparative advantage of cotton production to boost the textile industry. The

11) Gereffi and Frederick (2010). 12) Gereffi and Frederick (2010).

152 • 2015/16 Knowledge Sharing Program with Uzbekistan cotton textile value chain consists of cultivating seed cotton, harvesting cotton, ginning by separating cotton lint from cotton seed, manufacturing yarn from cotton fiber, manufacturing cotton fabric from yarn by weaving and knitting, and manufacturing clothing from fabrics by cutting and assembly.

In Uzbekistan, cotton is cultivated and harvested under tight state control. The state (Selkhozfond, a public fund under the Ministry of Finance) allocates cotton quotas to farmers and procures all the cotton produced under the state-set price. The public ginneries run by the state produce the cotton fiber. More than 60% of cotton fiber, most of which is of relatively higher quality, is exported by three trading companies (Uzprommashimpeks, Uzmarkazimpeks, and Uzinterimpex) under the Ministry of Foreign Economic Relations. The revenue from cotton exports in foreign currency is used for payment to farmers in Uzbekistan soms after conversion and held in the Selkhozfond. It is reported that there is a transfer of resources from cotton production from farmers to the government because the procurement price is set below world prices even if subsidies to the farmers through provision of water, fertilizers, pesticides, and machinery are taken into consideration. After export, the rest of the cotton, relatively of lower quality, is distributed domestically by the Uzbek Commodity Exchange to private firms and O’zbekyengilsanoat (previously, Ministry of Textiles), which has joint ventures with foreign investment and engages in promoting the export and domestic sales of local textile output.13)

Among the activities along the cotton textile value chain, Uzbekistan is most active in spinning, which manufactures yarn from fabric. Spinning is capital intensive, and its productivity is determined by the performance of the machines and cotton quality. Weaving and knitting, which produce fabric from yarn, are more labor intensive than spinning, although machinery plays an important role. Thus, spinning and weaving need a sizeable amount of financial investment and require machine maintenance by skilled shop-floor mechanics. Finally, apparel manufacturing is more labor intensive and dominated by the buyers who dictate designing and marketing. However, Uzbekistan’s apparel manufacturing is mostly domestically oriented.

Under the global value chain, various activities other than ginning are spread in different countries. This international division of production evolves in response to the changing conditions related to labor costs and competences of the participating countries. Uzbekistan needs not only to enlarge its capacity of its

13) We will discuss more in the following sections. For details about Uzebekistan’s cotton-related value chain, see Golub and Kestelman (2015). For the distribution of cotton and related financial flows, see Muradov and Ilkhamov (2014). Finally, for the transfer of resources from procurement price setting and overvalued som, see McDonald (2012).

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 153 Industry Strategy in Uzbekistan current production of cotton fibers and yarns but also extend its activity from the low-value-adding production of cotton fiber and yarn to weaving, dyeing and processing of fabrics, and manufacturing apparel.

The industry typically serves as the initial stepping-stone for export-oriented industrialization in many developing countries including Korea and many other successful Asian followers. Particularly, the textile industry’s labor-intensive production process contributed a lot to generating employment, thus, reducing poverty and accumulating business knowledge and the capital of local firms.

It is ideal for developing countries to develop integrated textile production processes stretching various activities in the value chain. Thus, the governments in many developing countries have made various efforts to increase their presence in the global value chain. They provided various incentives to foreign investors with fiscal and financial measures. In addition, they encouraged local manufactures by providing various support. It appears that downstream initialization in Asian countries was successful, but it was difficult to build vertical integration including mid- and upstream industries. This was primarily due to capital-intensive technology in the spinning and weaving processes, which requires a large amount of capital investment to exploit the scale economy. Thus, the spinning and weaving process agglomerates in locations where large demand exists for textile products and an abundant supply of cotton is available. Since Uzbekistan is landlocked, it has a big disadvantage to increase its presence in the world market other than activities immediately related to cotton production. Nevertheless, Uzbekistan could find its niche in some ranges of the cotton textile value chain.

3. Uzbekistan’s Textile Industry 3.1. Overview of Uzbekistan’s Textile Industry

Uzbekistan's economy has continued its strong performance, registering 8.2% average annual growth during the period 2005–2014. The industrial sector is one of the important sectors of the Uzbek economy. The average annual growth of industrial production during the period 2005–2014 was 9.3%. Because of this growth, the share of industry in GDP increased from 21.2% to 24.1%. Light industry (which includes the textile and the apparel industry, according to the economic classification in Uzbekistan) is a rapidly developing sector of the country’s economy. The following data illustrate this.

154 • 2015/16 Knowledge Sharing Program with Uzbekistan [Figure 3-3] Light Industry Output Growth

(Unit: 2005 = 100%) 900%

800%

700%

600%

500%

400%

300%

200%

100%

0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Light industry Textile industry Apparel industry

Source: IFMR calculations based on the data of the State Committee of the Republic of Uzbekistan on Statistics.

Between 2005 and 2014, light industry production more than doubled according to the State Statistics Committee of Uzbekistan. The textile industry’s output doubled, and clothing manufacturing increased 7.9 times. These industries account for a significant share of the total industrial production: light industry 14.1%, including textiles 10.4% and clothing 2.5%. Light industry includes industries such as textiles, clothing, leather, fur, and footwear. The textile and clothing industries account for the largest shares in light industry (see < Table 3-2>).

Light Industry Production Structure (Unit: %) 2005 2009 2014

Light industry 100 100 100

1. Textile industry 94.3 90.3 74.1

including

1.1. Ginning 66.2 64.1 39.1

1.2. Wool industry 1.2 2.4 3.1

1.3. Knitting industry 1.5 3.8 7.4

2. Apparel industry 4.5 6.8 18.0

Source: IFMR calculations based on the data of the State Committee of the Republic of Uzbekistan on Statistics.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 155 Industry Strategy in Uzbekistan Light industry is one of the main consumers of scientific and technical products, and introducing new technologies and innovative solutions can create a foundation for the production of competitive products both in the domestic and foreign markets. The textile industry has high turnover investment and rapid return on investment capital, and this, in turn, determines the higher efficiency and return on assets.

Today, Uzbekistan’s light industry is one of the fastest growing industries with this year’s growth rate expected to reach 116.1% of last year’s rate. Its share of GDP is 7.3%, and the total volume of industrial exports is 25.2%. In 2014, light industry as a whole provided 14.0% of total industrial production, of which 5.1% came from the cotton industry. This year, Uzbekistan exported 1047.7 million of cotton fiber. The United States accounted for 7.4% of the country’s total exports.

During the 2005–2014 period in industrial production, the textile industry sectors increased their role by producing products with high added value, such as sweaters, cardigans, pullovers, waistcoats, and similar articles, and knitted, the volume of which increased in the current year 6.6 times in comparison with the previous year. Additionally, the production of such items as a set of suits, jackets, and blazers increased 1.5 times compared to the previous year . At the same time, there was a slowdown in the production of products such as carpets and rugs (60%), fabric knitting machine knitting (94%), etc.

In 2014, the production of new types of products was mastered under the localization program in which local raw materials were used for • Technical herringbone tape made from cotton yarn (localization rate was 100%) • Tape made from polyester yarns and technical cords (37% isolation level) • Woven cotton fabrics blended for the rubber industry (localization rate of 47%) • Heat-resistant fabrics for metallurgical industry work apparel (localization rate of 40%) • Polypropylene yarn (localization rate of 35.1%) and acrylic yarn (localization rate of 95%) • Flannelette fabric (wool and wool-blend fabrics) (localization rate of 48%) • Synthetic knitting yarn (localization rate of 80%) • Synthetic filament complex (localization rate of 35.8%) • Polypropylene filament (localization rate of 35.2%)

Currently, there are more than 8,000 industrial enterprises of different ownership (including small businesses and entrepreneurships) in the republic’s light industry, including in the "Uzbekengilsanoat" (305), of which 253 are small

156 • 2015/16 Knowledge Sharing Program with Uzbekistan businesses and private entrepreneurships. The industry’s industrial enterprises mastered 42 new kinds of products, produced 29.2 million sqm of cotton fabric, 128 types of ready-made garments, and knitwear totaling 11.7 million pieces. The share of products produced in light industry, small businesses and private entrepreneurship was 18% in 2014 vs 11% in 2005 in the total amount of light industry of the republic.

The textile and clothing industry accounts for a significant share of employment in industry. The share continued to increase in recent years (see

). For example, the textile (excluding cotton ginning) and garment industry provides almost 14% of employment in the industrial sector.

Employment in Light Industry (Unit: %) 2009 2013

Industrial sector 100 100

Light industry 17.1 17.7

including

Textile industry (excluding ginning) 8.4 9.9

Ginninig 4.0 3.4

Apparel industry 3.6 3.9

Source: IFMR estimations based on the data of the State Committee of the Republic of Uzbekistan on Statistics.

The republic’s textile enterprises are concentrated in the state joint stock company (SJSC) “Uzbek light industry,” which includes more than 350 enterprises and organizations of different ownership types: textile enterprises, sewing- knitting enterprises, and silk enterprises. They supply the foreign market with a wide variety of products ranging from yarn to finished articles. Modern design and high-quality performance make the products competitive and enable the domestic manufacturers to expand their export market.

Today, more than 35% of the produced cotton fiber is processed within the country. Textile enterprises produce and export cotton yarn and fabric, dyed and mixed yarn, knitted fabrics, ready-made knitwear and garments, hosiery, terry articles, fabrics for special purposes, home textiles, uniform clothing, and other goods. In 1994, the domestic textile industry exported USD 8 million worth of goods, and in 2014 the figure exceeded USD 1 billion.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 157 Industry Strategy in Uzbekistan O'zbekyengilsanoat enterprises have been exporting their products to 45 countries, and the sales geography has constantly expanded. Textile garment and knitwear enterprises deliver their goods to the CIS countries, Europe, China, the U.S., Canada, and Arab states. Over USD 800 million worth of investment was channeled into the textile industry during 2010–2014. That empowered the commissioning and modernization of 147 enterprises with an export capacity of USD 670 million and establishment of over 8,000 new jobs. Over the years of independence, the industry raised over USD 2.2 billion and implemented more than 180 big investment projects.

3.2. SWOT Analysis of the Uzbek Textile Industry

3.2.1. Strengths

Uzbekistan’s textile sector has many strengths that determine its competitive advantage. A stable source of raw materials, high-quality cotton fiber, affordable resource prices, and a highly skilled workforce make the sector attractive for investment. Uzbekistan annually grows nearly 3.5 million tons of raw cotton and produces 1.1 million tons of cotton fiber. Today, Uzbekistan is the world’s sixth largest cotton producer, the fifth largest exporter, and the leading player in the global cotton arena.

Over the years of independence, the domestic crop breeders have bred 112 cotton varieties, 30 of which were included in the State Register of Uzbekistan and recommended for planting in different regions of the country. When planning the breeding works, the breeders take into account the climatic conditions, emphasizing parameters such as high productivity and fiber quality, and enhanced resistance to salinity and drought, diseases and pests, and extremely high temperatures.

The dynamically evolving institutional framework brings together more than a dozen research and production institutions, which annually breed and pilot about 50 new cotton varieties. The grades that yield up to 50 metric centners per hectare and fiber output ratio of 40% rank among the achievements.

Nearly 98% of the cotton Uzbekistan produced last season consists of the first and highest grades. Being a member of the Bremen Cotton Association and the International Cotton Advisory Committee, the Uzbek Center for Cotton Fiber Certification of SIFAT certifies fiber using modern HVI systems that meet the requirements of international standards. The ongoing program on technological re-equipment of the center’s branches envisages the replacement of the semiautomatic HVI 900 with the high-performance Uster 1000 by the end of 2017.

158 • 2015/16 Knowledge Sharing Program with Uzbekistan Relatively low energy prices are another advantage of Uzbekistan’s textile industry development. Therefore, there is a significant gap between the price of electricity in Uzbekistan and average world prices. Despite the fact that the gap gradually decreased during 2005–2014 (from 4.8 to 4 times), it still remains high.

[Figure 3-4] Electricity Price Ratio in the World and Uzbekistan

(Unit: cents/kWh) 25

0 2005 2010 2011 2012 2013 2014

World Uzbekistan

Source: IFMR calculations based on IEA and "Uzbekenergo."

The well-built transport infrastructure is an important strength. An efficient logistics system and optimal routes and corridors have ensured prompt delivery of Uzbek cotton fiber to all consumers. Uzbekistan has 21 specialized cotton terminals with a simultaneous storage capacity of more than 400,000 tons of fiber.

Factors such as expanded markets for textile product sales and weakened competitive advantages of the main competitor countries are opportunities for foreign investors and others. The presence of strengths such as a stable source of raw materials, as well as the fact that Uzbekistan exports large volumes of raw cotton, indicates that there are significant untapped potential and opportunities for deepening the degree of raw cotton processing. A systematic reorientation of domestic exports of raw materials for producing finished products with high added value requires the creation of new modern textile complexes with a complete production cycle. The Great Silk Road from Japan to Europe, which passed Uzbekistan, played an important role in developing Uzbekistan’s cotton and silk traditions.

The growth of labor costs in China provides opportunities for Uzbekistan. For many years, China held a strong competitive position in the finished product market. The restructuring of the Chinese economy, which has been going on in recent years, has led to a gradual increase in industrial production costs. This is due primarily to the increase in China’s average wage level and unit labor costs. Thus, according to the “China Business Climate Survey 2015,” the average salary

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 159 Industry Strategy in Uzbekistan increased by 13.9% annually in China's manufacturing industry during 2000–2013. According to the National Bureau of Statistics of China, labor costs increased by an average of 7.1% annually during 2012–2015 throughout the whole economy. Overall, during 2000–2014 the average unit labor costs in China grew 2.4 times (see [Figure 3-5]).

[Figure 3-5] Indexed Unit Labor Costs in the Manufacturing Sector of Selected Countries 2000–2014

(Unit: 2000 = 10)

240

220

china 200 (economy-wide) 180

160 2000=100 140 Canada 120 South Korea Germany 100

United States 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: National Bureau of Statistics of China.

Thus, China is losing its competitive advantage in the form of cheap labor. Manufacturing products in China is not very profitable, and Chinese products, which are exported, lose their competitive properties to other countries. For Uzbekistan, this opens additional opportunities for accelerated growth of the manufacturing sector. China has gradually ceased to be a competitor in the production of goods because of significant labor cost increases. In this regard, it is crucial to leverage the competitive advantages of relatively low labor costs for the development of labor-intensive industries, which include the textile industry.

3.2.2. Weaknesses

The specific feature of Uzbekistan’s textile sector is its dominance of primary textile production and a low degree of processing raw materials. One of its weaknesses is high import dependence on interim goods and accessories. Uzbekistan, unlike other competing countries, does not have adequate manufacturing capacities for the production of accessories, modern fabrics for clothing, woolen cloth, and high-quality leather. These deficiencies affect the domestic production of ready-made garments. As a result, both textile enterprises and the local population have to rely on imported fabrics for tailoring. Uzbekistan

160 • 2015/16 Knowledge Sharing Program with Uzbekistan also depends on imported equipment spares, lubricants, and chemicals. This weakness causes higher production costs because of current import regulations, transit time, transportation, etc.14)

Another weakness is the country’s geographical location. Export expansion is constrained by the country’s unfavorable geographical location, which has no direct access to seaports. Uzbekistan is a landlocked country, which makes external trade difficult and more expensive. Moreover, it is surrounded by landlocked countries, so it is double landlocked.

3.2.3. Threats

As is generally known, in the past 20 to 25 years, textile production has increasingly moved from Europe and the United States to Southeast Asia, Central Asia, and South America. Competition in the world’s textile product market is intensifying. The producers who supply low-cost products of high quality have a competitive advantage. On the one hand, developing countries compete for a niche in the global market for ready-made garments. On the other hand, they strive to attract foreign investors and technologies to their national textile industries. As a rule, the benefits are given to those countries that can offer the best conditions for foreign investors and the development of its textile industry. The governments of some developing countries have supported new textile enterprises by granting them tax privileges, investment guarantees, as well as direct export subsidies and tax credits. Foreign investors tend to gravitate towards countries that have both the adequate legal framework and liberal conditions for the production of export-oriented goods.

It should be noted that different countries use different methods to develop their textile industry. Some of them use the traditional sequence of development from the production of raw cotton, yarns, fabrics to finished products. In some countries, tolling is widely used to produce finished textile products. Many manufacturers produce garments using their own raw materials under well- known multinational firms (brands). For example, Bangladesh, a country that does not have its own raw material base, is practically based on factors such as cheap labor and a favorable geopolitical location (access to the open sea) and specializes only in sewing of finished products based on imported raw materials and on the orders of well-known clothing manufacturers. Another success factor is a favorable tax environment for textile enterprises,15) thereby, countries such as Bangladesh and others pose a threat to the competitive position of Uzbekistan’s textile industry in the world.

14) Textile Industry in Uzbekistan: Problems and Prospects/Policy Brief No. 5, 2006, UNDP. 15) CER (2005).

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 161 Industry Strategy in Uzbekistan

SWOT Analysis of Uzbekistan’s Textile Industry

Strengths Weaknesses

• A stable source of raw materials • Dominance of primary textile production and • High-quality cotton fiber low degree of processing raw materials • Affordable resource prices including raw cotton, • Technology cheap highly skilled workforce, and low energy • High costs for equipment and laboratory tests and utility costs • Lack of qualified administrative personnel and • Infrastructure (cotton terminals, transport, etc.) experienced managers who understand the • The presence of a number of large enterprises in specifics of the production process and are able the regions with a full cycle of production, from to manage yarn production to finished products • High import dependence on accessories, equipment spares, lubricants, and chemicals • Uzbekistan is double landlocked

Opportunities Threats

• The balanced reorientation of domestic raw • Potential competitors are Vietnam and materials exports for production of finished Bangladesh products with high added value • The reduction of consumer demand in • The possibility of using synthetic materials Uzbekistan’s major importing countries of • Potential markets of Central Asia, Russia, Turkey, textile products as a result of the crisis (Russia, and the Baltic states Kazakhstan) • The Great Silk Road • The high import tariffs of importing countries • The growth of labor costs in China (except Central Asia) • Opportunities for foreign investors (incentives and reduction of inspection and control) • A decline in cotton fiber exports and an increase in processing volume within the country are planned

3.3. Potential for Uzbekistan’s Textile Industry Cluster

In Uzbekistan there is a huge untapped potential for the development of the textile and garment industry. Uzbekistan is one of the world's leading exporters of cotton fiber and cotton yarn. Because this product has a low share of the value added, the country is, in fact, missing the opportunities of producing and exporting products that are more expensive.

Uzbekistan’s textile industry’s importance is, first of all, because the country has its own raw materials such as cotton, silk, and wool. The textile industry is also important because it provides employment and raises the country’s standard of living. Uzbekistan’s textile industrial cluster must develop intersectoral and interterritorial cooperation within the industry. Including petrochemical and chemical companies in this cluster will result in a single production chain to create

162 • 2015/16 Knowledge Sharing Program with Uzbekistan new competitive textile products using chemical fibers and yarns. In parallel, Uzbekistan should develop a fashion institute, a research and consulting center for light industry, and a coordination center cluster. These centers can provide services such as specialized education and research in the fields of technology and materials, a study of the clothing market, export development, intellectual property management, brand management, personnel development, quality management, and mediation of joint venture representatives of small business.

The cluster approach is used in Uzbekistan, as the Uzbek textile cluster began with the selected Scientific Research Institutes, where for more than 20 years, breeders of the republic withdrew more than 160 varieties of cotton. The scientists of the Institute of Genetics and Plant Experimental Biology, Academy of Sciences of Uzbekistan make a significant contribution to improving the quality of domestic cotton fibers.

The next link is the textile cluster ginning industry, which links the cultivation of cotton and its further processing. The industry’s united association is "Uzpahtasanoat," which includes 98 ginning factories throughout the country and 34 special workshops on the preparation of sowing seeds and supply chain, and other support units. In turn, the Uzbek Centre for Certification provides certification of cotton fiber and textile products. Along with the processing of developing these cluster members as silk weaving, carpet manufacturing, production of knitwear and garments, finished fabrics, hosiery, and so on.

The final link in the textile cluster system can serve the development of modern styles of clothes, taking into account the country’s national traditions and climatic conditions, along with widespread promotion of domestic producers in foreign markets, such as design centers. However, the lack of a system, the fragmented operation of the textile cluster, and insufficient regulatory controls and incentives do not allow Uzbekistan’s textile industry to operate as a cluster in the true sense.

The cotton-cleaning sector is the most dominant sector in the industry. Enterprises in this sector are usually located in areas close to cotton sowing regions. The major centers of raw silk and silk cloth production are Ferghana, Namangan, and Bukhara. There are cloth factories now operating all around the nation. Khiva is famous for its carpet-making industry.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 163 Industry Strategy in Uzbekistan

Regional Structure of Light Industry Product Production

(Unit: %)

Light industry total Textile Apparel

Total republic 100.0 100.0 100.0

Karakalpakstan 2.6 3.4 0.5

Andijan region 11.6 10.2 12.5

Bukhara region 7.6 9.2 4.1

Jizzakh region 3.7 4.8 0.5

Kashkadarya region 7.4 7.2 11.1

Navoiy region 3.5 2.8 6.0

Namangan region 6.7 6.5 6.5

Samarkand region 8.3 8.7 8.8

Surkhandarya region 4.6 6.1 0.3

Sirdarya region 5.1 4.7 5.4

Tashkent region 9.6 8.7 16.2

Fergana region 12.7 12.4 8.2

Khorezm region 4.3 5.7 0.6

Tashkent city 12.2 9.6 19.2

Source: IFMR calculations based on the data of the State Committee of the Republic of Uzbekistan on Statistics.

In terms of cotton fiber production for the period 2005–2013, the regional shares of Surkhandarya, Syrdarya, and the Republic of Karakalpakstan increased, respectively, from 9.8% to 10.3%, 4.9% to 6.5%, and 5.3% to 6.1%, while that of Tashkent increased slightly. During the same period, those of the following areas decreased slightly: Andijan (by 0.8 percentage points), Bukhara (0.9 percentage points), and Kashkadarya (0.6 percentage points).16)

16) S. Lee, S., V. Kim, Z. Asfandiyaranova, and S. Karimov, “Further Modernization and Competitiveness Enhancement of the Industrial Sector of Uzbekistan through Creation of Industrial Clusters,” a manuscript for KSP (2015).

164 • 2015/16 Knowledge Sharing Program with Uzbekistan [Figure 3-6] Production Share of Cotton Fiber by Region

2005 2013 Republic of Republic of Khorezm Karakalpakstan Khorezm Karakalpakstan 5% 5% 8% 6% Fergana Andijan Andijan 7% 8% Fergana 7% 7% Tashkent reg 7% Tashkent reg Bukhara Bukhara 7% 10% Syrdarya 12% 5% Syrdarya Djizzakh 7% Sukhandarya Djizzakh 7% 12% 7% Sukhandarya 10% Samarkand Kashqadarya 13% 7% Kashqadarya Samarkand Namangan 14% 7% Navoi Navoi Namangan 7% 4% 4% 7%

Source: IFMR calculations based on the data of the State Committee of the Republic of Uzbekistan on Statistics.

Uzbekistan plans to create a research textile industrial park. Its establishment was already launched with the support of the Ministry of Commerce, Industry and Energy of Korea. It is deemed to become a source of manpower for new textile enterprises, which will have advanced equipment and apply the latest information and communication technologies. Moreover, there is a growing demand globally for the fabrics that resist wetness, contamination, deformation, and do not lose color. South Korea has been leading in this field, so the technology park would allow the introduction of technological knowledge in the domestic enterprises, establishment of cooperation between researchers of the two countries in material engineering, dyeing, and finishing plants, new textile and clothing designs, and much more.

The South Korean government will fund the building and construction works, technological equipment, and staff training. To date, Korea approved the project implementation in 2015 in terms of design specifications and estimates. The launch of the technical park is scheduled for the end of 2017. The planned industrial park could become the basis for developing Uzbekistan’s textile cluster. Figure 3-5 is a conceptual diagram of Uzbekistan’s textile cluster.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 165 Industry Strategy in Uzbekistan [Figure 3-7] Conceptual Scheme of the Textile Cluster in View of Uzbekistan’s Existing Potential

Institutional Financial- Tax Infrastructure environment credit sector environment environment

Cotton proce ssing Scientific and educational Suppliers of equipment enterprises and suppliers Suppliers of accessories, infrastructure and spare parts for the of raw materials(silk, dyes and other ancillary (research institutes, textile industry wool) for the textile products universities) inldustry

Textile enterprises Certification Authority Transport infrastructure Sprinning Weaving Knitted Marketing service Production Pfoduction Production

Sewing Design Other Production centers consumers

3.4. Current Strategy and Government Policy for Uzbekistan’s Textile Industry Development

Most of Uzbekistan’s textile enterprises are concentrated in the SJSC “O’zbekyengilsanoat” (Uzbek light industry), which includes more than 350 enterprises. O'zbekyengilsanoat is the main agency conducting development policy of the light and textile industry. [Figure 3-8] shows the organizational structure of O'zbekyengilsanoat.

166 • 2015/16 Knowledge Sharing Program with Uzbekistan [Figure 3-8] Organizational Structure of O'zbekyengilsanoat

Stockholders Meeting

Supervisory Board

Chairmen

First Deputy Chairman- Deputy Chairman Deputy Chairman Personner Chief Manager (production) (economy) department

General Directorate of General Directorate of Department of advanced Financial and Economic investment and joint Technical Policy and training of management Analysis Division venture Fore casting and engineering personnel

Material and natural Department of cotton Accountion resoural resources Law department production department department

Department of technology, Department of sewing standardization and quality and knitting

Corporate management Department of Silk Industry and Privatization Development Department

Department of design development

The main tasks of O'zbekyengilsanoat are as follows: • Implement marketing research on the internal and external markets, and carry out research and forecasts of the demand dynamics for textile products, knitting, sewing, etc. • Promote saturation of the consumer market with high-quality domestic products of light industry based on the population’s demand • Strengthen the export potential of the textile industry by supporting enterprises in implementing international activities • Implement unified technical and investment policy in the textile industry • Promote cooperation between enterprises of the textile, knitting, and garment industry, and the localization of production • Wide attraction of foreign direct investment to introduce modern technologies, develop new products, and modernize and technically re-equip • Assist enterprises to conduct the company's market reforms, training, and skills development

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 167 Industry Strategy in Uzbekistan Police measures are conducted in the development of Uzbekistan’s textile industry in the framework of number of acts and programs. The key documents setting out the government policies for the textile industry development are as follows: • Resolution of The Cabinet of Ministers #141 on Measures to Improve the Structure of the State Joint-Stock Company "O'zbekyengilsanoat" and Encourage Further Development of the Light Industry (2004) • President Resolution #456 on Streamlining the Mechanism of Realization and Payment for Cotton Fiber • Program to modernize and technically re-equip the textile industry for the period 2006–2008 • President Resolution #733 on Measures for Improvement of Sales of Cotton to Domestic Users and Development of the Textile Industry (2007) • Act on additional measures to stimulate modernization and technical re-equipping (2007) • Program to modernize and reconstruct the cotton industry during 2007–2011 • President Resolution #1398 on Organization of Timely and Quality Harvesting of Cotton—Harvest of 2010 (2010) • Program for Uzbekistan’s industrial development for 2011–2015 • Program of structural reforms, modernization, and diversification of production for 2015–2019

Various incentive measures are used as part of the textile industry development policy. Primarily, they aim to the deepen raw material processing. In addition, these measures focus on modernizing equipment and processes in the textile industry. It should be noted as well that a whole set of export-promotion measures were created (see

168 • 2015/16 Knowledge Sharing Program with Uzbekistan

Major Incentives in the Textile Industry

Types of incentives Duration

15% discount for cotton prices for local companies (based on From 2003 international prices)

Profit tax exemption Property tax exemption Jan. 2009–Jan. 2018 Single tax payment exemption (for micro- and small enterprises) Deductions to the Republican Road Fund exemption

Exemption from customs duties for imported equipment, components, and raw materials not produced in the country used for Jan. 2009–Jan. 2018 the production of non-food consumer goods (including textile goods)

Exemption from the payment of import customs duties for imported chemicals, dyes, accessories, and other support materials that are not March 2004–Jan. 2018 produced in the country (for "Uzbekengilsanoat" enterprises)

Export-promotion incentives

Removal of export duties on all types of goods From 1997

Exemption from value added tax (VAT) for the material resources used From 2008 in the production of exported goods

Exemptions from the tax on income received from export From 2000

Establishment of property tax depending on the export share in total From 2000 goods sales

This year marked the launch of a specialized program to develop light industry, which envisages the commissioning of over 100 new joint ventures in the next five years operated by the most advanced technologies and equipment. In addition, the government held an international fair where government representatives called upon international partners for active cooperation with Uzbekistan in establishing joint textile manufacturers.

Uzbekistan plans to channel USD 918 million into the implementation of 77 projects in the textile industry by the end of 2019. The funds will be invested in the creation of vertically integrated textile complexes in different regions of the country, as well as establishment of new and expansion of existing production facilities jointly with world leaders of textile machinery. It is expected that the projects will at least double the current capacities.

Uzbekistan’s policy in this area is based on maintaining stable production volumes of cotton not through expanding areas but by means of introducing

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 169 Industry Strategy in Uzbekistan modern agricultural technologies that allow increased yields. In this context, developing innovative technologies for fiber production and improving its quality and performance characteristics remain priorities for the coming years.

3.5. Strategy and Policy Assessment

There are some limiting factors in the textile sector development policy. Some of the main restrictions are the difficulties companies have in accessing high-quality raw cotton at acceptable prices, the relatively high costs of long- term loans, and barriers impeding foreign trade transactions. Raw materials for the national textile industry are based on the residual principle—after the sale of cotton fiber for export. The government decided that cotton prices for local companies be set based on international prices (Liverpool Cotton Exchange) minus 15%, which actually equals the savings on transportation costs. However, this discount is not enough to ensure the competitiveness of cotton production. The discount rate was set more than ten years ago. For this reason, it is necessary to revise the discount level.

Government policy focuses on developing the sector, but numerous serious problems persist. There are problems with inadequate cotton processing capabilities for cotton and the non-competitiveness of the final output in the product chain—fabrics and apparel. Cotton fiber and yarn continue to be the main export items, which means the country is delivering products with low added value to the external market.

Being a lead exporter for products with low value added, such as cotton and cotton yarn, Uzbekistan deprives itself of the opportunity to manufacture and export products that are more expensive, as their sales could significantly increase the country’s export earnings. Furthermore, the large-scale domestic production of fabrics, knitted products, and apparel would enable hard currency savings by reducing the imports of similar products. These examples illustrate that Uzbekistan has substantial untapped potential for the development of its textile and apparel industries.

Additionally, cotton buyers are required to pay with hard currency. According to the current rules (President Resolution #733 dated November 21, 2007), all manufacturers producing for the domestic market can buy cotton only with hard currency. Considering the on-going difficulties related to the convertibility of domestic currency, it appears that this measure is a significant hindrance for textile producers manufacturing for the domestic market. Furthermore, excessive export-orientation of yarn, fabric, and other semifinished product manufacturing (because of the need to generate hard currency to buy cotton) does not help

170 • 2015/16 Knowledge Sharing Program with Uzbekistan advance the processing of these commodities and manufacturing of products with higher value added.

Furthermore, the competitiveness of the Uzbek spinning industry is decreasing because of the inconsistency of the cotton sold with the technology used. For instance, most domestic spinning mills use pneumospinning technologies. International prices for yarn manufactured using this method are lower than for products manufactured with ring-spinning technology. Respectively, yarn from lower grades of cotton must be manufactured at pneumatic spinning mills. Currently, more than 95% of Uzbek cotton is certified as superior grade; thus, spinning mills have to buy expensive cotton, which interferes with generating good profit margins. Furthermore, the mix of four to six types of cotton is essential to produce good-quality yarn. Usually, there is no range at the depots; thus, finished products are often not as of the high quality as they could have been.17)

Another restriction is the high tax burden and the unstable financial situation of textile enterprises. The tax burden on local textile enterprises is much higher in Uzbekistan than in the neighboring countries. Even under the most favorable circumstances, when an enterprise exports its goods and it is reimbursed VAT, the profitability level is much lower than that of not only China, Bangladesh, and other developing countries but also of Kazakhstan and Russia. Furthermore, compulsory payments to the road, school, and pension funds, which are calculated based on the total volume of the produced goods, add considerably to the tax burden. Social taxes paid by employers and personal taxes paid by employees are also much higher in Uzbekistan than in other countries. There are also huge differences in the tax privileges enjoyed by select textile enterprises, which distort the competitive environment, especially since they are not transparently given in accordance with any structured government policy. Such differentiation is to the advantage of local enterprises with shares from foreign investors as well as those included in the system of O'zbekyengilsanoat. It puts all other enterprises at a substantive disadvantage.

17) Y. V. Naumov, I. L. Pugach, and Y. B. Yusupov. "Uzbekistan’s Textile Industry: How to Implement Development Potential?" Policy Brief, 1(14), UNDP (2010).

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 171 Industry Strategy in Uzbekistan 4. Korea’s Experience in Textile Industry Development 4.1. Evolution of Korea’s Textile Industry

The cotton textile industry has been a major manufacturing industry since the Japanese colonial period. The first cotton textile plant in the Korean Peninsula was built in 1917 by Japanese capital and followed by the first plant established by Korean capital in 1919. During the Japanese colonial period, textiles accounted for 12.4% of manufacturing production in 1940 and cotton textiles accounted for half of that. Under economic turmoil after the Korean War, the Korean government implemented the textile industry restoration plan during 1953–1957. As a result, the production of cotton yarn, cotton fabric, and silk fabric grew 24.1%, 17.8%, and 10.1% per year, respectively, between 1953 and 1959.18) In 1956, the production of cotton and silk textiles satisfied the domestic demand, and the import of cotton, wool, silk, and knitted fabrics was banned. In 1961, the import of foreign-made clothing was also restricted. With decreasing aid from the U.S. and high unemployment, the Korean government planned to develop the textile industry as a strategic export industry to earn hard currency and create jobs. Thus, the cotton textile industry became a major industry along with the sugar and floor manufacturing industries, so called the three white industry in Korea.19)

In the early 1960s, Korea started producing synthetic fiber such as nylon and materials such as polyester. The synthetic fiber industry grew rapidly with a sudden increase in clothing exports. The textile industry output increased more than 30% per annum with apparel exports at a similar growth rate until 1980. In the early 1960s, the major textile export merchandise were clothes such as sweaters and fabrics such as cotton. In the late 1960s, the export of products made of synthetic fiber increased rapidly along with expansion of production facilities of synthetic fabric production. As a result, the number of textile industry workers increased 13.8% per year between 1963 and 1975. In 1975, the textile industry employed about 30% of the manufacturing labor force. Textile industry exports increased amazingly by 60% per year between 1963 and 1975.20)

Because of the favorable world economic environment and adequate government policy, Korea’s economic growth took off in the 1960s. The economic

18) Lee (2011). 19) The first cotton textile plant was built in 1917 by Japanese capital, and the first plant built by Korean capital was built in 1919. During the Japanese colonial period, the textile industry accounted for 12.4% of manufacturing production in 1940 and cotton textiles accounted for half of that. 20) Lee (2011).

172 • 2015/16 Knowledge Sharing Program with Uzbekistan growth rate rose from less than 5% (1954–1961) to approximately 9% (1961– 1974). During this period, manufacturing GDP grew substantially by 18.4% per year (1961–1974). The value added by the textile industries including leather and footwear grew approximately 20% per year, and their share in total value added increased by more than 30% in 1974.21) Although the textile industry’s share declined afterwards because of the rapid expansion of the heavy and chemical industries, the textile industry played a central role in Korea’s export-oriented economic development until the early 1990s.

The textile industry’s role in export growth is confirmed by the top exports of Korea over time. The textile industry was the number one export industry in 1970 and 1980. Although it gave up first place to the electronics industry in 1990, it was second in terms of export volume in 1993, even after the heavy and chemical industries became major contributors to economic and export growth. Although Korea focused its policy on promoting the heavy and chemical industries starting in the early 1970s, the light industries including the textile industry contributed to economic growth until the 1990s. Rapidly rising wages in the late 1980s after democratization stimulated the structural adjustment of the textile industries in the 1990s as the labor-intensive process was relocated abroad. Korean firms increased foreign investment starting in the late 1980s, and it reduced the share of Korea’s textile industry in Korea beginning in the 1980s. However, it should be mentioned that the absolute amount of exports in light industries continued increasing despite the declining share because the total amount of Korea’s exports increased rapidly.

[Figure 3-9] Korean Textile Industry Trade Balance

(Unit: million USD) 200

150

100

0 1980 1985 1990 1995 2000 2005 2010

Export Import Trade Balance

Source: Korea International Trade Association DB.

The textile industry’s total exports including apparel increased until 2000. As Korea’s textile firms shifted their assembly lines abroad, it started decreasing in the

21) These figures are from Kim and Roemer (1979).

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 173 Industry Strategy in Uzbekistan 2000s. However, Korea’s textile industry’s trade balance continued to be a surplus. It is expected from the long-term trend in [Figure 3-9] that it may turn into a deficit in the future. However, Korea’s textile industry exports have remained without much decline recently. Still, the textile industry in Korea exports about 3% of total exports (2010), employs about 7% of total exports (2009), and holds about 10% of establishments (2009).22)

This implies that to sustain high growth, an economy should not only find new promising industries but also maintain continuous growth of its existing industries. For continuous growth of existing industries, there should be continuous structural change within the existing industries. This is what happened in Korea’s textile industry. While labor-intensive clothing exports and output started decreasing in the late 1970s, other textile products such as yarns and fabrics made from synthetic fibers and polyester filament fabrics increased rapidly, as shown in

. The consumption of chemical fiber clothing such as acrylic sweaters increased rapidly worldwide beginning in the 1970s, and the production of polyester fabrics increased, driven by exports.

Korean Textile Industry’s Export Structure Evolution

(Unit: Export share in percentage) 1980 1990 1995 2000

1 Woven clothing 31.4 Woven clothing 21.3 PET fabrics 24.3 PET fabrics 16.3

2 Knitted clothing 16.6 Knitted clothing 17.5 Knitted clothing 12.7 Knitted fabrics 13.4

3 PET fabrics 8.8 Leather clothing 12.6 Woven clothing 10.8 Knitted clothing 13

4 Other fabrics 7.6 PET fabrics 12.6 Other fabrics 7.5 Woven clothing 10.6

5 Leather clothing 6.5 Other fabrics 8.7 Knitted clothing 6.6 Other fabrics 7.9

Note: PET fabric is a polyester filament fabric. Source: Lee (2011).

While the clothing trade surplus decreased since its peak in 1990, chemical fiber, yarn, and fabric exports increased, as shown in

. Textile materials such as polyester filament fabrics, which require large-scale facilities, high technology, and more labor that is skilled, increased exports to rising apparel producers in the world market such as China and Southeast Asian countries where assembly lines were set up to target the markets in developed countries.

22) Ministry of Knowledge Economy (2010).

174 • 2015/16 Knowledge Sharing Program with Uzbekistan

Trade Balance by Textile Product in Korea

(Unit: million USD) 1985 1990 1995 2000 Chemical fiber -8 119 778 697 Yarn 401 253 -233 10 Cotton 145 18 -137 -399 Wool 65 84 -11 -24 Chemical 39 9 -11 589 Fabric 1,230 3,513 8,149 8,746 Wool 21 -73 -69 12 Cotton 106 159 132 366 Chemical 774 2,222 5,069 3,429 Knitted 0 311 1,175 2,426 Clothing 4,228 7,462 3,700 3,410 Knitted 1,447 2,539 2,015 1,999 Woven 2,205 3,073 1,451 1214 Leather 576 1,850 234 197 Other 514 1,103 1,048 1,131 Total 6,363 12,450 13,442 13,995

Source: Lee (2011).

To summarize Korea’s textile industry evolution, the industry started with cotton yarn and fabric production in the 1950s and grew rapidly with exports of clothes and expansion of backward-linked industries, particularly, synthetic fabrics for which demand increased quickly in the 1960s. The textile industry’s production capacity increased with promoting the heavy and chemical industries, which increased the supply of petrochemical raw materials (polyester chips) for textiles in the 1970s. With rising labor costs and intensifying international competition, the textile industry underwent a structural adjustment by rationalizing industry through scrapping worn-out facilities and relocating assembly lines abroad. In the 1990s, Korea reinforced its competitiveness of its textile industry by focusing on competitive textile fabrics and developing the knowledge-intensive textile industry such as new textile materials and fashion design.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 175 Industry Strategy in Uzbekistan 4.2. Textile Industry Promotion in Korea

From the above description of Korea’s textile industry evolution, the development stage of Korea’s textile industry development can be characterized as a restoration of the textile industry under import substitution policy during the 1950s, rapid growth under export orientation during the 1960s and 1970s, rationalization and structural adjustment during the 1980s and 1990s, and advancements in technology and knowledge-intensive products since the 2000s. In this section, we discuss what the government did to promote Korea’s textile industry.

History flows incessantly, and it may be dangerous to distinguish the government policy by period. However, we cannot deny that Korea’s economic growth spurted in the mid-1960s after the Korean government pursued export- oriented industrial policy. Particularly, Korea’s textile industry was at the center of export promotion in the 1960s. It is argued that the sudden increase of textile exports in 1963 might have initiated the idea of export-oriented development policy afterwards.23) The export growth in the 1960s was driven by textile exports, which stayed out of the top ten exports in 1961 but accounted for more than 50% of the total merchandise exports in 1970. Therefore, the export promotion policy in the 1960s could be considered as the promotion of the textile industry promotion, although the export promotion policy did not discriminate the kinds of products but supported whatever could be exported.

The Korean government took the first policy action toward export orientation with exchange rate reform in 1964 by devaluing the Korean won by almost 100% and switching to a unitary floating exchange rate system. It signaled the end of its import substitution policy stance of the 1950s. In the 1950s after the Korean War, Korea’s economy depended heavily on aid from the United States, and the Korean government tried hard to restore its industrial base. Under the resource shortage, including foreign exchange, the government focused on restoring its existing industrial base including cotton fabric production by protecting local industry from foreign imports. As the U.S. aid decreased beginning in 1956, the Korean government paid attention to exports to earn foreign exchange. The government introduced some policy incentives for exports such as an export- import link system and export bounty, which provided direct incentives to the exporting firms. Short-term finance was also provided for working capital for trade. These incentives helped textile firms increase their cotton yarn exports beginning in 1958. However, under the import substitution policy regime, exports

23) Lee (2012).

176 • 2015/16 Knowledge Sharing Program with Uzbekistan were pursued by firms in order to increase imports.24)

The military government that took power in 1961 announced that economic development was the top priority and adopted export-oriented industrialization as the main engine of economic development. The government intervened heavily in investment activity and established comprehensive export incentives. The public investment, which was concentrated in building industrial infrastructure, averaged approximately 35% from 1963 to 1979.25) Furthermore the government controlled private investment through the approval of foreign loans of private firms. Until the 1980s, the investment financing heavily relied on imported foreign capital, and the government provided official repayment guarantees to foreign loans, which were critical in order for private firms to get foreign loans. To plan and implement the development strategy, the government established the Economic Planning Board, a control tower that had both planning and budgeting authorities.

The full-blown outward-looking strategy was initiated in 1964 with exchange rate system reform. The Korean won was devalued in 1964 from 130 won to 256 won per U.S. dollar, which made the highly overvalued Korean won slightly undervalued, considering the purchasing power parity and the unitary floating exchange rate system that was adopted in 1965.26) Since then, the Korean government maintained a stable real exchange rate through flexible exchange rate adjustments. The normalization of the exchange rate system reduced the macroeconomic anti-export bias, as the Korean exporters had been relieved from currency risk with relatively stable real exchange rates throughout the 1960s and 1970s, unlike other underperforming developing countries.

With exchange rate system reform, the government began setting up the annual Export Promotion Plan that specified the targets and action plans for the year. The Export Promotion Plan was prepared by the Ministry of Commerce and Industry who monitored monthly export trends. The Korean government introduced the comprehensive export promotion incentive schemes that included fiscal and financial incentives and administrative support. The major important incentives were preferential credit to exporters, tariff exemption on imports of capital equipment for export production, wastage allowance of imported raw materials for export production, accelerated depreciation for fixed capital directly for export production, and reduced income tax on export earnings.

24) Under the importer registration system and export-import link system, firms that had certain export records were allowed to import with foreign exchange earned from exporting. 25) Sakong (1993). 26) Kim (2001).

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 177 Industry Strategy in Uzbekistan Additionally, it is worth noting that the government provided tax incentives to the firms that provided intermediate goods for export production. Unlike the previous export promotion incentives in the 1950s, it was comprehensive since the scheme covered not only various incentive measures for exporters but also incentives to export production. In 1965, the local letter of credit system was introduced to extend incentives to firms that generated value added although they did not export directly. Another thing to note is that firms had tariff-free access to intermediate input and raw materials imported for export production. Although it changed beginning in the late 1960s, the apparel manufacturers could choose any supplier, domestic or foreign, when purchasing input and, thus, procure input at world prices. They also had automatic access to bank loans for working capital for exporting, often with preferential interest rates.27) Moreover, export incentives such as export credit were automatic as long as firms showed their export records and did not discriminate against firms, for example, by the firm size. This automatic credit to exporting firms minimized the case-by-case discretionary decision-making of bankers and tax officials and shortened the policy delivery time.28)

The Korean government also established institutions to promote exportation. The monthly export promotion meeting was held beginning in 1965 to monitor the trend of exports, the world market situation, and the progress of necessary policy actions to achieve export targets.29) The policy stakeholders including high- ranking public officials and leaders from the business community, political parties, and academia gathered to reassure the national goals and coordinate policy actions. Particularly, this meeting presided by the president and the top political leadership was meaningful in terms of bringing the attention of national leaders to the progress of export-oriented industrialization strategy. The government established KOTRA (the Korea Trade Promotion Corporation) and Koryo Muyeuk, a trading corporation that trades products made by small and medium firms, to help firms overcome the limited capabilities in finding overseas buyers.

With rising export of textile products, the government recognized the textile industry as a key export industry (export specialized industry) and poured in the policy resources necessary for establishing an industrial base. In the early 1960s, the government paid attention to quality control of products and worker training on the shop floor. The government established various research institutes to overcome the textile industry’s technological problems. The Korea Textile Technology Research Institute and the Korea Apparel Testing and Research Institute were established in 1963 and 1964, respectively. The Korea Fabric

27) Ahn and Kim (1997). 28) Ahn and Kim (1997). 29) The meeting continued to be held monthly until 1986.

178 • 2015/16 Knowledge Sharing Program with Uzbekistan Testing Center (currently, FITI) was established in 1969. The government approved and supported the opening of textile majors in 20 engineering schools. The government also established regional public vocational schools, special classes for industrial workers in school, and approved the in-house school in large firms.

As a result, clothing exports increased quickly and demands for synthetic fibers also increased in the 1960s. Synthetic fibers such as nylon, acrylic, and polyester were first produced in the mid-1960s, and the exports of textiles using synthetic fibers increased rapidly. As synthetic fabrics replaced cotton fabrics, there was an oversupply of cotton fabrics, and the government tried to control the expansion of the textile industry’s production capacity and promote the replacement of worn-out equipment by enacting the Law on Temporary Measures for Facilities for the Textile Industry in 1967. The Ministry of Commerce and Industry had authority to approve the investment projects related to the textile industry and give subsidies to replace worn-out facilities. This implies that the government started to intervene in the industrial linkage of the textile industry as the value chain expanded in Korea.

In the 1970s, the textile industry grew quickly with the expansion of petrochemical industry production that supplied raw materials for synthetic textiles. The construction of the Ulsan petrochemical complex was completed in 1972, which reduced the reliance on imports of chemical materials for synthetic fibers. In 1979, Yeochon petrochemical complex opened with an integrated production system from basic olefin, such as ethylene, to final products such as polypropylene. The expansion of the domestic petrochemical and synthetic fiber production industry substituted domestic products for imports. The full-set industrial linkage from raw materials to apparel manufacturing strengthened the comparative advantage of Korea’s textile industry in the 1970s and 1980s, thus, promoting the heavy and chemical industries with the help of strong policy support indirectly promoted Korea’s textile industry.

The Korean government was also active in providing a favorable environment to the textile firms. It was realized with the construction of the industrial complex that was given priority in infrastructure investment. Korea’s first industrial complex, Korea Export Industrial Complex, was constructed in Guro near Seoul to provide space for export production. The industrial complex not only provided space but also administrative and business services to the firms. In 1969, Daegu Local Industrial Complex was constructed and became a cluster for the textile industry as many synthetic fabric manufactures moved in. As a result, in the 1970s, Korea became one of the big three textile exporters along with Hong Kong and Taiwan.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 179 Industry Strategy in Uzbekistan However, the textile industry encountered trade protection of developed countries with the MFA, which was introduced in 1974 and imposed textile export quotas, and competition from rising low-wage exporters. Thus, the government enacted the Law to Promote Modernization of Textile Industry in 1979. Based on the law, the government intended to promote the international competitiveness of the textile industry. The law let the Ministry of Industry and Commerce establish a plan to modernize the textile industry, which included production facilities, replacement of old machinery, technology and human resources, specialization and systemization of industries, and export-related issues. The law specified the establishment of the Textile Industry Modernization Fund and the Korea Federation of Textile Industries, which was given authority to manage the fund to replace worn-out equipment, rationalize production capacity, develop technology, and upgrade products. The fund provided the long-term credit to the textile industry with a preferential policy interest rate. The new law replaced the Law on Temporary Measures for Facilities for Textile Industry enacted in 1967 that regulated entry and capacity expansion. The new law allowed the expansion of production facilities in fabrics manufacturing and dyeing and induced competition in the hope that it could lead to restructuring the textile industry by market force.

The law also specified the construction of a textile industrial district to promote specialization and systemization. In 1981, Daegu (Bisan) Dye Industrial Complex began operation, followed by Banweol Dye Industrial Complex in 1987. The agglomeration of dyeing plants in the complex along with supporting research centers facilitated the efficient process of wastewater and improvement of dye technology.

It was a policy response to the realization that the textile industry was losing international competitiveness with rising wages and an appreciating real exchange rate. It was also considered that the textile industry had been ignored because of the emphasis on promoting the heavy and chemical industries in the 1970s. Thus, the government paid attention to upgrading the technology of the textile industry and SMEs, most of which manufactured synthetic fabrics. In 1977, the Korea Textile Technology Training Center (currently, the Korea Textile Development Institute) was established in Daegu to train technicians for the SMEs.

However, even with increased investment in the textile industry, the export market was under a recession in the early 1980s, and the competitiveness of textile industry declined with wage increases and a shortage of skilled workers, the demand for which rose rapidly because of the growing heavy and chemical industries. Textile manufacturing and dyeing underwent a rationalization under

180 • 2015/16 Knowledge Sharing Program with Uzbekistan the Industry Development Law enacted in 1986, which provided financial support for restructuring production facilities. The government induced the scrapping of worn-out equipment and exit of unprofitable firms, restricted the expansion of dyeing machines, and introduced the registration of existing facilities.

With the enactment of the Industrial Development Law, the government shifted the framework of industrial policy from an industry basis to a functional basis and emphasized support for technological development. The government prepared the 7-Year Plan for Restructuring of the Textile Industry in 1989. It aimed to change the textile industrial structure from quantity-oriented mass production based on labor-intensive processes to quality-oriented small-quantity customized production based on technology and knowledge-intensive processes. It also emphasized designing and processing to make the product quality equivalent to that of developed countries.

The textile industry was supported by the Industry Foundation Technology Development Program that started in 1987. It supported R&D activities to remove the technological bottlenecks and develop cutting-edge technology for industries including the textile industry. It also included a support system for the R&D activities of SMEs. Financial support that contributed 50%–60% of expenditures for selected research projects was given for developing new textile materials, training of young designers, fashion industry globalization, production process automation, and conversion of business from OEM to ODM or OBM. During 1999– 2003, the government established the Korea Dye Technology Research Institute in 1996 to revitalize the textile cluster in Daegu and implemented a large-scale program, the so-called Milano Project, which constructed a fashion center and installed infrastructure for the fashion industry. This program was implemented as a project of regional industrial policy that aimed to reduce the regional economic disparity. Many regional research institutes for the textile industry were established as hubs of a regional innovation system.30)

However, the traditional textile industry has been on a downward path since the 1990s. As a result, large textile firms discontinued the domestic operation of traditional textile business and switched to the high-quality, functional, and industrial textiles, which are based on chemical industrial capabilities. In 2007, the New Textile Strategic Technology Development Program was planned that aimed to acquire original technology and develop human resources and technological standards related to next-generation cutting-edge textile materials.

30) The Milano Project did not achieve the result that the policymaker intended, which was to promote Korea textile product branding that requires long-term efforts emphasizing marketing and creativity. However, the policy horizon was thought to be short, and the allocation of policy resources concentrated on facilities construction.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 181 Industry Strategy in Uzbekistan 5. Implications of Korea’s Experiences and Policy Recommendations 5.1. Success Factors of Textile Industry Development in Korea

In Sec. 2, we know that the textile industry’s upstream of fiber and yarn production is capital intensive and, thus, dominated by large enterprises, and the midstream production and fabric processing (dyeing and finishing) is relatively less capital intensive. The downstream (apparel and final product production) is very labor intensive. Usually, the SMEs tend to participate in the value chain in the mid- and downstream process. The technologies used to produce textile products, except for cutting-edge new textile materials, are mature and can be transferred easily across countries through the purchase of equipment in which the technologies are embedded. Therefore, the textile industry’s value chain is not dominated by the suppliers but driven by buyers who catch the ever-changing trends of the market’s final demand. Thus, it is easy to enter the market of the downstream textile industry with a small amount of capital as long as a firm can recruit a large number of low-wage workers. The entry into the upstream requires more capital and sometimes higher technology, e.g., in the case of synthetic fibers.

Therefore, the downstream textile industry plays a central role in initiating industrial development in many developing countries. However, it becomes difficult to extend the domestic value chain upstream. It requires more capital, higher management skills, and a shift toward more value-adding products. If it fails to move toward higher-value-adding activities, then growth stops and the industry declines with rising wages. Thus, textile industry development is self- defeating without continuous upgrades. Particularly, in the globalized world, the footloose multi-national firms easily relocate their production sites and change suppliers, which accelerates the rise and decline of a country’s textile industry.

The success of Korea’s textile industry lies in its continuous extension of its local value chain following market signals from export markets. In the mid-1960s, the textile industry’s growth was driven by the exports of downstream products such as dress shirts and sweaters. As a result, the imports of raw materials such as synthetic textiles increased, and local firms scaled up in this midstream process to catch the profit opportunity from rising demands. The manufacturing facilities were imported on a turn-key basis with borrowed foreign capital, through which the local production capacity increased quickly. The overactive investment invited government intervention (1967 Law on Temporary Measures

182 • 2015/16 Knowledge Sharing Program with Uzbekistan for Facilities for Textile Industry) to control the expansion of facilities and convert the oversupplied products to export markets. Finally, the supply of raw materials for the textile industry was localized with the completion of large petrochemical industrial complexes in the 1970s. The large enterprises ventured into the petrochemical industry under the full support of the government.

Therefore, we may say that the most important success factor of Korea’s textile industry development is its gradual shift in the value chain from downstream to upstream. This was possible because of profit-seeking private enterprises that found business opportunities in the textile industry and expanded their width and depth of business following the market signals.31)

The initial stage of textile development was possible for several reasons. First, Korea had abundant cheap labor and inexpensive raw materials that allowed price competitiveness. Second, the world economy grew quickly with the advance of the free-trade system. Unlike the pre-war period when the South’s major export products were commodities such as raw materials, the share of manufactured exports increased rapidly and the export of labor-intensive goods by developing countries started growing quickly. Third, the Korean government found the manufacturing industry’s potential to boost economic growth, adopted export-oriented industrial policy, and induced the expansion of private enterprises with various incentive measures.

With rising demand for upstream products, large enterprises found business opportunities in the synthetic textile industry, which could substitute imports. The government facilitated investment by providing official repayment guarantees of foreign loans. With the rapid expansion of the synthetic textile industry, the government used its visible hand to control the supply chain and induce the private enterprises to export markets. This was the second stage of textile development.

In the 1970s, heavy and chemical industry promotion was the Korean government’s top priority, which heavily intervened in allocation of financial resources and gave preferential financial and fiscal treatment to large enterprises that invested in strategic industries set by the government. The petrochemical industry was one of six strategic industries, and petrochemical complexes were constructed in large scale. In the 1980s, the economies of scale in the supply of raw materials for the textile industry were an important comparative advantage of Korea’s textile industry. It still allows Korea to export upstream textile products.

31) See the story of textile firms in Appendix 2.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 183 Industry Strategy in Uzbekistan The government’s development of the textile industry is, first of all, the provision of a favorable business environment to local firms, particularly, exporting firms in the 1960s. As presented in Sec. 4, the government removed the anti-export bias that was the legacy of the inward-looking policy stance in the 1950s. It reformed the exchange rate system and maintained the exchange rate around the equilibrium, which removed the exchange risk of exporters. Then, the government established a consistent and comprehensive export-promotion policy framework. It was consistent in that the government did not change its policy stance for a long time, and the policy measures were prepared to achieve a clear target of export growth. It was comprehensive in that the government utilized the various measures if proven effective and established institutes such as KOTRA to implement the policy effectively.

However, the Korean government did not take over the role of economic activity, which is the essential role of private enterprises in a market economic system. Instead, it concentrated on providing adequate infrastructure to nurture industrial foundations, e.g., industrial complex construction, human capital development, credit system establishment, and public R&D. Even in the heavy and chemical industries’ promotion the 1970s when the government selected strategic industries and specific investment projects and strongly intervened in resource allocation, the tasks of actual investment and business were given to private enterprises.

In addition, the policy measures undertaken by the Korean government, clear in their targets, were relatively effective in implementation. The export- promotion policy was designed to increase the export performance of firms, which were easy to monitor. The support was performance based and enforced the market signals. The incentives given to exports were unrestricted and automatic. Bank loans for the working capital needed for exports were given automatically with certificates of export. The Bank of Korea automatically rediscounted the export loans that banks made to exporting banks. This shortened the time for policy delivery, increased effectiveness, and reduced the discretion of bureaucrats and bankers. However, the government was very tight in detecting abusers by requiring documentation on the completion of exports with input coefficient certificates.

Furthermore, the Korean government always highly considered local competitiveness by looking at the world market. In the early 1960s, the Korean government did not discriminate against the domestic and foreign suppliers by giving unfettered access of exporters to raw materials and intermediate goods. They could choose between domestic and foreign suppliers that competed with price and logistics. With the development of the upstream textile industry, the

184 • 2015/16 Knowledge Sharing Program with Uzbekistan government tried inducing the increase of the domestic market but soon tried to push upstream industry into the export market. Even with the heavy and chemical industry promotion, which was implemented by many developing countries to substitute imports, the Korean government targeted the world market from the start. This resulted in larger-scale industrial production capacity that was unrestricted by the domestic market and allowed economies of scale to compete internationally.

In the history of textile industry promotion, it is found that the policies that focused on supply-side expansion were not so successful as those on the demand-side expansion, such as export promotion. In 1979, the Law to Promote Modernization of the Textile Industry resulted in the expansion of production facilities in fabrics manufacturing and dyeing by subsidizing the investment of firms. Without much effort to diversify products and develop new ways of business, the expansion of existing product lines resulted in the textile industry’s deterioration with the worldwide recession in the early 1980s and invited restructuring of the industry by the government. Additionally, the Milano Project, a large-scale project that focused on the supply side without paying attention to the demand side, was unsuccessful. The target of the Milano Project was ambiguous because it was planned as a policy to encourage local industry as well as the textile industry. While the center of the fashion industry was in Seoul, the project targeted the Daegu area, which was losing competitiveness of its traditional textile manufacturing. While the fashion industry’s competitiveness lies in human capital and access to buyers, the project resulted in constructing a fashion center and installing equipment.

5.2. Implications for Uzbekistan and Policy Recommendations

In Sec. 3, we already mentioned the strengths and opportunities of Uzbekistan’s textile industry. Among the many factors of Uzbekistan’s strength, we cannot deny that the critical one is the availability of high-quality cotton fiber in the country. Therefore, the policy in the short and medium term should focus on increasing domestic cotton spin processing and extending the value chain to weaving and apparel manufacturing. This will increase the value addition of the textile industry rather than exporting cotton fiber. Since the comparative advantage of Uzbekistan’s textile industry is in its cotton production, the policy should be designed to exploit this advantage to the benefit of forwardly linked textile industries.

Thus, the current imperative for Uzbekistan’s textile industry development is to extend the cotton textile value chain from cotton production to manufacturing

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 185 Industry Strategy in Uzbekistan of cotton yarn, fabric, and apparel. Therefore, from the policymakers’ standpoint, the supply-side production capacity and engineering concerns may dominate the concerns for the market and businesses. Since the textile industry uses mature technology that could be easily transferred through the purchase of capital, production and engineering problems can be relatively more easily overcome rather than the issue of the profitability of a business finding a market for its products.

Therefore, the first thing we have to be reminded about for developing Uzbekistan’s textile industry is that demand-side consideration for expanding the textile industry overwhelms other considerations. Korea’s experience shows the typical development pattern of the textile industry which started from the downstream toward backwardly linked upstreams. This is a natural pattern of the textile industry’s development since technology is mature and the textile industry is buyer driven.32) In this regard, export-oriented industrial promotion was critical to increase the demand for Korea’s textile industry from clothing in the early period to fabrics and textile materials in the later period of development. Therefore, the right macroeconomic management, adequate exchange rate policy, and favorable microeconomic business environment were critical for the textile industry to develop even though they are general factors applied to all industries including the textile industry.

Therefore, it is imperative that Uzbekistan manage the exchange rate near market equilibrium and allow transactions that more liberalized of foreign exchange for commercial purposes. With a distorted exchange rate with a high black market premium, it is difficult to invite the foreign capital that is critically needed to expand Uzbekistan’s textile value chain. The overvalued Uzbekistan som under tight control of foreign exchange transaction is now one of critical obstacles to local value-chain development of textile exports.

It is also important to nurture a favorable business environment that encourages the business activities of private enterprises. According to the World Banks’ Doing Business Indicators, Uzbekistan ranks 146th overall and 189 in trading across borders. There is much room to improve, considering that the ranks of Kazakhstan and the Kyrgyz Republic are 50 and 68, respectively.33) The Doing Business environment is critical for Uzbek textile firms to participate in the global value chain. The ranking reflects the time and financial costs encountered by foreign investors.

32) This pattern has been observed in many developing countries with successful textile industry development including China (Tiankai, 2012), Ghana (Asare, 2012), Maritius (Callychurn et al., 2014), and Vietnam (Hill, 1998). 33) Pomfret (2014).

186 • 2015/16 Knowledge Sharing Program with Uzbekistan Improving the macroeconomic environment to do business in Uzbekistan can build the country’s reputation and strengthen its international linkages by inducing more foreign capital and more exposure of local business abroad. To emphasize again, it is not imperative for the Uzbek government to undertake a large-scale expansion and modernization project of the textile industry to re-equip the industry. Instead, it should create a favorable business environment that would incentivize private firms (both foreign invested and domestic invested) to undertake the expansion and modernization of the textile industry themselves.

With these implications from Korea’s experience, we list what the Uzbek government may be interested in.

First, more active invitation of foreign direct investment is required to increase local cotton fiber processing. There are some foreign-invested firms in Uzbekistan, e.g., Daewoo International, Osborn Textile, Indorama Kokand Textile, Uztex Tashkent, and so on. Most foreign-invested enterprises manufacture cotton yarn, except for Osborn Textile, which also produces fabrics and clothing. Considering the comparative advantage of cotton production, it is not surprising that there are some spinning firms now. However, to increase the local cotton processing rate, more firms should be present in Uzbekistan. Therefore, more invitations to spinning firms should be a policy goal in the short run. Considering the textile industry’s value chain, the policy target should be to attract weaving firms that manufacture cotton fabrics. This could be a short-term to medium-term policy goal.

Currently, there are fiscal incentives such as the partial exemption of corporate income tax and full exemption of land and property tax for the initial years of investment.34) However, these are not enough to induce foreign investment since many other developing countries provide similar tax incentives. In Uzbekistan, the remittance of profits and dividends is notoriously difficult and takes a long time. It seems to critically deter capital flow into the country. Although it may not be possible to relax the foreign exchange control, in general, it is necessary to apply it to the firms in strategic industries such as the textile industry. Administrative action could be given to the exporting foreign-invested firms (cotton yarn and fabric manufacturers) in a designated region.

A daring incentive should be given to invite downstream manufactures abroad. This could be a long-term goal of FDI inducement. As mentioned in Sec. 3, China’s rising wages are an opportunity. However, Uzbekistan’s income and wage levels are higher than other developing countries with which Uzbekistan

34) The exemption rates are different depending on where the firms invest and how much they invest.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 187 Industry Strategy in Uzbekistan should compete.35) Particularly, to exploit increasing exports to adjacent countries such as Russia, Uzbekistan should induce the investment of regional buyers by providing more incentives and improving the transportation infrastructure. For this, it may be necessary to create special export processing zones (EPZs) for the textile industry.36) However, it would not be an easy task since Uzbekistan has the geographical disadvantage of being landlocked with high transportation costs and scattered population with a large share of the population in the rural areas. Therefore, the government may try customized EPZs targeting specific markets with specific niche products.

Second, it is necessary to remove anti-local-production bias in Uzbekistan’s system. To promote the local cotton processing rate through spinning and weaving in Uzbekistan, two policy actions are needed to remove the anti-local- production bias in fabric production and increase the local demand for fabrics.

It is reported that the advantage of rich cotton production is not exploited by local textile manufacturers including foreign-invested enterprises.37) Although the government set the cotton prices for local manufacturers at a discounted rate of 15% of the world price, it is not advantageous if the transportation cost is taken into consideration. Thus, local textile producers do not have the competitive advantage of a cotton-rich country at input prices. In addition, the local manufacturers should buy the cotton fiber with foreign exchange, which increases the transaction cost of procuring input under the difficult convertibility of the Uzbekistan som into foreign currency .

It is also reported that the quality of the cotton procured by local textile producers tends to be lower than that of exported cotton. While exported cotton faces international competition, the cotton for local manufacturers is distributed by the government (O’zbekyengilsanoat), and sometimes its quality does not meet international standards.38) In addition, the local firms with small working capital are unable to reserve the required varieties and types of cotton and sometimes have difficulty and waste time procuring it. In this regard, the local spinning firms do not have the advantage of being located near cotton producers and face disadvantages due to the inadequate system of Uzbekistan’s local cotton market .

35) In 2013, Uzbekistan’s per capita income was close to USD 2,000, which is higher than that of Bangladesh (USD 958). 36) Currently, Uzbekistan has three special economic zones including Navoi FIEZ. They do not accommodate textile industries; instead, they accommodate business in the engineering and agro- industrial sectors. 37) Naumov et al. (2010). 38) Based on a local interview. Even though the cotton grade is overstated at certification, buyers cannot negotiate the price with the government.

188 • 2015/16 Knowledge Sharing Program with Uzbekistan Therefore, the Uzbekistan government may need to distribute the cotton to the local market at a discount rate more than the current 15%. According to economic theory, if the local textile industries do not have the competence to produce competitive products, it could become a waste of government revenue. However, if the textile industry develops, it could become a source of export earnings from cotton. The development of local cotton processing will create jobs, particularly, jobs for the poor.

To extend the cotton textile industry’s local value chain, the government should also reform the tax system, which is inconsistent with textile industry development. First of all, it needs to reform the VAT refund system for exported yarn and fabric. Yarn and fabric producers get VAT refunds when they export their products. However, if they sell to domestic buyers, they are not eligible for VAT refunds. This leads to higher prices, which hinders the development of forward-linked business. As a result, good-quality input tends to be sold abroad.39) This is not surprising if we consider Uzbekistan’s underdeveloped downstream textile industry. However, if Uzbekistan wants to extend local cotton processing, the VAT refund system should be extended to local downstream producers or exporters at least. Establishing an EPZ could help overcome this problem. As the Korea’s experience shows, the VAT refund system should be extended to the whole value chain of export business, and it should be exercised automatically, expediently, and consistently.

Another problem with the tax system related to downstream textile production is the high import duties on materials not produced in Uzbekistan.40) It is reported that the imports of synthetic fibers, accessories, and auxiliary materials face high import duties. Apparel manufacturing requires a variety of materials even though the products are mostly made of cotton fabric. In addition, the currency convertibility exacerbates the procurement of raw materials for Uzbekistan’s downstream textile industry. As mentioned, the EPZ may relieve the problems of tax disincentives and delayed VAT refunds.

Third, attention should be paid to policy for exports of the mid- and downstream textile industries. Currently, the major exporters are foreign-invested enterprises. It is critical to promote the appearance of domestic manufacturers of mid- and downstream products in export business. The O’zbekyengilsanoat supports textile exporters by assisting with export marketing of the textile industry. It may be better to enforce this function by assigning it to a separate

39) Naumov et al. (2010) 40) Although equipment imports are exempted from import duty, the spare components are not. The delayed procurement of components lowers the utilization rate, and the high price of components deteriorates the equipment maintenance.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 189 Industry Strategy in Uzbekistan agency specialized in trade promotion.41) It is worth noting that Korea’s KOTRA is a specialized institute separate from the government bureaucratic system, although it delivers the policy order being monitored by the government. In addition, industry association activities should be enforced. In a sense, the O’zbekyengilsanoat is now an industry association consisting of about 250 companies. However, the autonomous bottom-up demand-driven channels for opinions from business fields help a lot to make an efficient strategy to expand markets.

Fourth, it is critical to modernize the spinning and weaving equipment to improve the textile industry’s productivity. This cannot be done by the government. The supply-side expansion promotion of Korea’s textile industry was not so successful. Instead, the government should provide an environment for local textile entrepreneurs to scale up their operation. The government should let go of its remaining grip on domestic firms by liberalizing the textile industry business. Although privatized, the operation of domestic firms could be severely dictated by the government, which monopolizes cotton distribution in the country. Therefore, the government should gradually release its grip on the value chain starting with cotton production and the procurement system, which could be a long-term process requiring political decisions.

Another critical obstacle is the difficult access to capital of Uzbekistan’s yarn and fabric producers. It is told that the inconsistency between the cotton sold and the technology used in Uzbekistan decreases the competitiveness of the Uzbek spinning industry. While the quality of Uzbek cotton is high, the old machines used in local companies are inadequate for high-quality cotton.42) Although the government introduced fiscal incentives such as exempting imported equipment from tariffs, Uzbek bank loans are short term, which retards the long-term investment of firms relying on loans. This problem could be expected since the financial system does not have adequate credit information and just requires collateral that creditors cannot provide.43) In addition, there are many companies with overdue loans. It is reported that firms with a poor financial record face a shortage of working capital, although they have an export contract or letter of credit. According to the estimate of Naumov et al. (2010), the availability of a high-cost investment loan is a critical obstacle for the expansion of the weaving industry. Therefore, the government may set up a fund that targets credit expansion to the textile industry, particularly, local weaving firms.

41) Currently, there is an organization that promotes the exports of the SMEs in Uzbekistan. It may be possible to make this organization more effective in promoting textile exports of local firms. 42) Naumov et al. (2010). 43) There is no land ownership in Uzbekistan. Instead, it is leased long term.

190 • 2015/16 Knowledge Sharing Program with Uzbekistan Fifth, the government could increase its assistance to firm-level improvement in equipment maintenance by facilitating the training of technicians and engineers and technological advances in processing products such as dyeing and finishing. As mentioned in Sec. 3, a textile industrial park for learning and research launched by the cooperation of Uzbekistan and Korea could become a center for these functions.44) To utilize the newly established institute to its maximum, its operation should be closely linked to the local textile business. Once completed, the management of the center should be assigned to a responsible and able agent with clear target customers. The center may catalyze the further assistance of Korea to Uzbekistan such as the provision of production facilities underutilized in Korea. Another thing to be done by the government is to upgrade the existing human development institutes such as the Tashkent Institute of Textile and Light Industry, which was a unique textile research institute in the Soviet era and has manpower with high potential. To realize the potential, the relationship between the institute and local textile companies should be strengthened through research projects. Thus, the re-equipping of institutes and discovery of joint research projects should be pushed through public funding or the fund already mentioned above.

Sixth, the development of timely, accurate, and comprehensible data on Uzbekistan’s textile industry is necessary. Without accurate statistics on the industry’s current situation, it is impossible to set up effective policy actions. One important mission of the EPB, the control tower of Korean economic development, was data collection. Particularly, to induce foreign capital, internationally comparable data are critical for foreigners to assess local attractiveness.

Finally, the policy priorities of developing Uzbekistan’s textile industry are summarized in

based on the above policy recommendations.

44) For details about the Korea-Uzbekistan Techno-Park, see Appendix 1.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 191 Industry Strategy in Uzbekistan

Recommended Policies for Textile Industry Development

Strategy Action plan

• Improve doing-business environment Actively invite foreign direct • Rationalize cotton fiber distribution investment • More discounts of cotton fiber for local production

• Special EPZs for the textile industry Expand activities of • Reform the VAT refund system Uzbekistan textile firms • Remove import duties on materials not produced locally

Expand export markets • Specialized marketing taskforce or organization

• Reform credit system with expansion of long-term credit Modernize equipment • Special fund for textile industry modernization

Develop human resources • Upgrade existing institutes and training system

Improve technology • Maximize Uzbek-Korea cooperation in the textile industry

192 • 2015/16 Knowledge Sharing Program with Uzbekistan References

Ahn, C. -Y. and Kim J. -H., “The Outward-Looking Trade Policy and the Industrial Development of South Korea,” The Korean Economy 1945–1995: Performance and Vision for the 21st Century, KDI, pp. 339–382., 1997. Asare, I. T., “Critical Success Factors for the Revival of the Textiles Sector in Ghana,” International Journal of Business and Social Science 3(2), 307–310, 2002. Bain & Company, China Business Climate Survey Report 2015, 2015. Callychurn, D. C., K. Soobhug, and D. K. Hurreeram, “Key Success Factors for the Apparel Manufacturing Industry: A Case Study at Company X,” Proceedings of the World Congress on Engineering 2014, Vol II, 2014. Cotton Incorporated, Monthly Economic Letter, Feb. 2016. Fernandez-Stark K., S. Frederick, and G. Gereffi, “The Apparel Global Value Chain: Economic Upgrading and Workforce Development,” Center on Globalization, Governances & Competitiveness, Duke University, 2011. Gereffi, G. and S. Frederick, “The Global Apparel Value Chain, Trade and the Crisis: Challenges and Opportunities for Developing Countries,” Policy Research Working Paper, World Bank, 2010. Golub, S. and S. Kestelman, Uzbekistan‘s Cotton Value Chain,” a report to UNCTAD, 2015. Haraguchi, N. and G. Rezonja, “In Search of General Patterns of Manufacturing Development, “ Working Paper, UNIDO, 2010. Hill, H., “Vietnam Textile and Garment Industry: Notable Achievements, Future Challenge,” Appendix II of the Industrial Competitiveness Review, Report prepared or the government of Vietnam, 1998. Hong, S. -D., Sources of industrial growth and structural change, 1955–85 , KDI, 1994 (in Korean). Hong, W. -T., Trade, Distortions and Employment Growth in Korea, Korea Modernization Study Series, KDI, 1977. International Cotton Advisory Committee, World Apparel Fiber Consumption Survey, 2013. Kaplinsky, R. and M. Morris, A Handbook for Value Chain Research, International Development Research Center, 2000. Kim, K. -S. and M. Roemer, Growth and Structural Transformation: Studies of the Modernization of the Republic of Korea 1945–1975, Korea Development Institute and Harvard University Asia Center, 1979. Kim, K. -S., “Evolution of Industrial and Trade Policy in Korea,” Institute for Global Economics, 2001.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 193 Industry Strategy in Uzbekistan References

Lee, J. -D., “Economic Development Model of the Development in Skill-intensive Textile Industry,” 2011 Modularization of Korea’s Development Experience. MKE and KIET, 2011. Lee, S., V. Kim, Z. Asfandiyaranova, and S. Karimov, “Further Modernization and Competitiveness Enhancement of the Industrial Sector of Uzbekistan through Creation of Industrial Clusters,” a manuscript for KSP, 2015. Lee, Y. -H., “The Switch of Development Strategy in the First Half of 1960s and Its Historical Background,” KyeongJaeNonJip 51(1), 107–123, 2012, (in Korean). Lewis, W. A., “Economic Development with Unlimited Supplies of Labour,” The Manchester School of Economic and Social Studies 22 (2): 139–191, 1954. MacDonald, S., “ Economic Policy and Cotton in Uzbekistan,” USDA, 2012. Ministry of Knowledge Economy, “Textile and Fashion Industry,” White Paper on Knowledge Economy, 2010. Muradov, B. and A. Ilkhamov, “Uzbekistan’s Cotton Sector: Financial Flows and Distribution of Resources, “ Open Society Foundation, 2014. Naumov, Y. V., I. L. Pugach, and Y. B. Yusupov, "Uzbekistan’s Textile Industry: How to Implement Development Potential?" Policy Brief, 1(14), UNDP, 2010. Paulson J. and N. Yuldashbaev, “Cotton and Products Annual Report,” GAIN Report, Global Agricultural Information Network, 2013. Pomfre, R., “Trade Costs and Agricultural Trade in Central Asia,” Discussion paper, Lebniz Institute of Agricultural Development in Transition Economies, 2014. Rhee, Y. W., “The Catalyst Model of Development: Lessons from Bangladesh’s Success with Garment Exports,” World Development 18 (2), 333–316, 1990. Sakong I., Korea in the World Economy, Institute for International Economy, 1993. Tiankai, W., ”Sustainable Development of China Textile Industry and Win-Win Cooperation in Global Textile Industry,” China National Textile and Apparel Council, 2012. UNDP, Uzbekistan Office, “Textile Industry in Uzbekistan: Problems and Prospects,” Policy Brief No. 5, 2006.

194 • 2015/16 Knowledge Sharing Program with Uzbekistan Appendix

Appendix 1: Korea-Uzbekistan Technology Cooperation

The first stage of the Korea-Uzbekistan Textile Cooperation was implemented by KITECH (Korea Institute of Industrial Technology) under the Ministry of Trade, Industry and Energy of Korea between 2005 and 2013. Currently, as the second stage, the Korea- Uzbekistan Textile Techno-Park is being constructed.

The first stage cooperation was executed in the fields of knowledge sharing in establishing technology (survey of the Uzbekistan textile industry including demand structure and local industry technology), foundation establishment (information exchange in technology and marketing), and industry support (technology seminars and local technical support). It consisted of various visits of Koreas experts to Uzbekistan and interaction of related personnel of both countries.

The major project of the second stage that began in 2014 is the construction of the Techno-Park, a five-year project that will run from 2015 to 2019. The Techno-Park will focus on transforming Uzbekistan’s textile industry to high-value-added areas of production. In the end, it aims to promote Uzbekistan’s textile industry as the hub of the CIS-oriented new textile production belt. For this, Korea prepared the budget through the ODA project to construct the Techno-Park. The Techno-Park will be used to train textile experts, analyze and evaluate fabrics and garments, pilot a plant system for knitting, dyeing, and finishing garments, and R&D of the advanced textile technology. Thus, it will include a training building (office, classroom, and laboratory) and production building (pilot plant). Equipment will also be provided for the analysis and evaluation activities and the pilot plant. The Techno-Park is located in the center of Tashkent with a total area of 0.75 ha near the Tashkent Institute of Textile and Light Industry and Ozbekyengilsanoat.

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 195 Industry Strategy in Uzbekistan Appendix

[Figure 3-10] Techno-Park Basic Design

Appendix 2: Growth of Korea’s Textile Firms

There have been many successful textile firms in Korea. Here we introduce Daewoo and Hansae.

Daewoo was founded in 1967 and became a major conglomerate until it collapsed in 1999 after the economic crisis. Daewoo started as a garment export company. The company started by concentrating on labor-intensive garment production and benefited from export promotion policy such as export credit. The company grew quickly by diversifying its business in response to government policy incentives and the changing economic environment. In the 1970s, the company shifted its focus to the heavy and chemical industries such as automobiles, shipbuilding, consumer electronics, and general trading. Daewoo was aggressive in expanding its overseas operation beginning in the early 1970s. It was one of the early starters in garment production, which established the global value chain. With the MFA, the developed countries introduced quotas on garment imports that limited the export of garments manufactured in Korea. Additionally, Korea’s rising wages deteriorated the cost competitiveness of domestic production. Thus, the Daewoo Corporation also suffered severely from the quota system. The company invested in Bangladesh to establish a production base there and cooperated with a new

196 • 2015/16 Knowledge Sharing Program with Uzbekistan indigenous enterprise, Desh Ltd. in 1979. Daewoo invited 130 new Bangladeshi employees to Daewoo’s factory in South Korea and trained them intensively for eight months in diverse skills from sewing to factory management and marketing. Since then, the trainees have become the major workforce and entrepreneurs who developed the garment industry in Bangladesh.45)

Hansae started its business in 1972 as a trading company exporting garments in Korea. It is now a major OEM (or ODM) producer of garments in the world market. It produces garments for major global brands such as GAP, Nike, Zara, H&M, DKNY, Victoria Secret’s, and so on. Its sales increased to more than KRW 1 trillion in 2012, and it now plans to introduce its own brand. It currently employs about 650 in Seoul and 36,000 in overseas production sites. Including supporting companies, about 50,000 are employed in the business. It produces apparel globally by operating in Myanmar, Vietnam, Indonesia, China, Guatemala, Nicaragua, and the U.S. It also produces fabric in Vietnam. It has in-house research and development in Seoul and New York that focus on design and developing materials. In 2008, the company established the New York Design Center that strengthened the leader position in ODM. The company’s major competitive strength is its quick response to the needs of major buyers in terms of sourcing, design, and quality control.46)

45) Rhee (1990). 46) Company website (https://www.hansae.com).

Chapter 3 _Korea’s Textile Industry Development Experience and Its Implications for Developing a Textile • 197 Industry Strategy in Uzbekistan

Improvement of the Postgraduate Education System and Training of Research Personnel

1. Introduction 2. Postgraduate Educationin Uzbekistan 3. Postgraduate Education in South Korea 4. Policy Recommendations ■ Chapter 04

Improvement of the Postgraduate Education System and Training of Research Personnel

Seul Ki Choi (KDI School of Public and Management) Doniyor Djunaydullaev (Institute of Forecasting and Macroeconomic Research)

Summary

One of the important directions of Uzbekistan’s higher education sector development is the training of university and research institute specialists who are highly qualified and have a doctorate degree. In order to improve the quality of doctoral education, the two-stage postgraduate education (two scientific degrees “candidate of sciences” and “doctor of sciences”) was replaced with a single level “doctor of sciences” in 2012. However, experience shows that the educational process level is not efficient enough, and, in fact, a doctoral student comprehends the theoretical part and acquires research skills on their own without the required assistance and supervision from the scientific adviser. In this regard, we believe there is a need to find ways to improve the efficiency of scientific personnel training based on the experience of South Korea.

The doctoral degree and school system is similar to that of the United States. Graduate schools were categorized as general, specialized, and special graduate schools. While general graduate schools focus on studying basic theories and conducting advanced academic research, studying practical theories and conducting research in the professional career field are the main purposes of specialized graduate schools, and special graduate schools aim to provide continuing education to workers or regular adults. Furthermore, integrated master’s and doctoral degree programs were introduced, making it possible to continuously receive master’s and doctoral education. The training is debt on

200 • 2015/16 Knowledge Sharing Program with Uzbekistan the strong coursework programs, and it is led by the school faculty. However, the government’s role based on legislation is also important. For example, the types of graduate schools are provided in the law in addition to the management conditions. The law contains the details necessary for degree programs, such as the terms of the school year and semester, the number of school days, and credit hours per course .

This chapter presents actual cases of doctoral programs in Korea to see how the programs operate. The cases are outlined in the order of different stages, from admission, curriculum, thesis application qualification exam, and writing a dissertation. The doctoral degree programs of Seoul National University’s Department of Economics, Department of Physics & Astronomy, and Department of Computer Science and Engineering were chosen as case studies.

Based on Korea’s experience, the policy recommendations are given as follows. The education system for a doctoral degree can be categorized into coursework and dissertation. Educational infrastructure comprises administrative support, financial support, and governance to monitor the entire process. In Korea’s case, the education system is basically managed by the department. Although laws are enacted to regulate the big picture, detailed regulations for student selection and faculty evaluation are established by each department. Coursework and curriculum are also organized and operated at the departmental level. Departments are also the administrative organization for support and operation. Therefore, doctoral degree programs should be reorganized by departments as units.

To build an excellent department, it is most important to hire and manage excellent faculties. To offer competitive and varied coursework, each department should have a large enough faculty. To evaluate and prompt the academic performance of faculties, universities in Korea have ranks of professor and a tenure system. Korea’s universities have a teacher evaluation system to provide feedback and improve teacher performance.

It is also important to require doctoral students to write good dissertations. The Korean government and the Korean Council for University Education strongly recommend adopting a variety of policies to improve the quality of dissertations. They monitor if there is any significant violation in coursework procedure. Research ethics is also important. To handle ethical issues, the Institutional Review Board is established in many schools. It is encouraged to publish dissertations in an academic journal or make presentations at conferences. All dissertations are digitalized and can be searched for at the Research Information Sharing Service, which is managed by the Korea Education and Research Information Service.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 201 It should be admitted that it is difficult to finish a doctoral study within three years when it has a strong curriculum and a rigorous dissertation writing process. In South Korea, the average number of months to complete doctoral study is 61.2 months (five years and one month). To pursue quality and quantity of doctoral study in Uzbekistan, it should be considered to reschedule the doctoral study over four to five years and give extra time when necessary.

1. Introduction

The education system in the Republic of Uzbekistan has faced significant changes since the country’s independence because of the Law on Education, which was adopted in 1992 and reformed in 1997. Essential development of the education sector started in 1997 with the adoption of the Education Act and the National Program for Personnel Training, which provided a long-term strategy for strengthening education, developing a continuing education system, and reinforcing the multi-level higher education system.

The overall management of the education system is carried out by the Department on Social Policy operating under the Cabinet of Ministers of Uzbekistan.The direct supervision of the activities of higher education institutions is carried out by the Ministry of Higher and Secondary Special Education.The reforms in the country’s higher education sector have resulted switching to a two-level structure consisting of a four-year bachelor’s program and a two-year master’s program.Higher education institutions provide educational programs of higher education at the bachelor’s, master’s, and postgraduate levels of study in specific fields of professional training.

Nowadays, the training of highly qualified specialists who have a doctorate degree in universities and research institutions is one of the important directions of Uzbekistan’s higher education sector development.In order to improve the quality of doctoral education according to the President's Resolution of July 24, 2012 named “On further improvement of system for training and attestation of research-pedagogical human resources of highest degree level,” the existing two- stage postgraduate education (two scientific degrees “Candidate of Sciences” and “Doctor of Sciences”) have been replaced by a single level “Doctor of Sciences.”

In accordance with Decree No. 365dated December 28, 2012 on postgraduate education approved by the Cabinet of Ministers, the doctoral training process of the applicant consists of two parts: • Doctoral degree pretender during the first year is to master the curriculum of the theoretical and methodological course on the chosen specialty that is

202 • 2015/16 Knowledge Sharing Program with Uzbekistan developed by the scientific advisor/consultant. • For the second and third years of study, a pretender is given a developed and approved qualification training program in the disciplines defined by the Higher Attestation Commission (HAC), depending on the direction of science.

Qualifying educational programs are developed by senior academic staff and doctoral degree pretenders on their own.

Researchers during the three-year training period must pass exams in • the field of specialty, • Uzbekistan history, • a foreign language, and • anadditional two or three disciplines defined by the HAC, depending on the area of science.

In our opinion, the main issues affecting the quality of the training of graduate students are as follows: • No clearly regulated educational process for doctoralpretenders • Imperfect scientific management and weak control over the training and research process • Relatively low percentage of doctoral dissertations defended within a period of training (three years)

Experience shows that the educational process level is not efficient enough and, in fact, a doctoral student comprehends the theoretical part and acquires research skills on their own without the required assistance and supervision from the scientific adviser.In this regard, we believe there is a need to find ways to improve the efficiency of scientific personnel training based on the experience of the Republic of Korea and other developed countries.

This chapter is organized as follows: • Section 2: Postgraduate Education in Uzbekistan • Section 3:Postgraduate Education in South Korea • Section 4: Policy Recommendations

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 203 2. Postgraduate Education in Uzbekistan

2.1. Background

Education in Uzbekistan is carried out in accordance with the Constitution, laws "about education" and "about the national program for personnel training," decrees of the president of the Republic of Uzbekistan, as well as government regulations. In general, education can be divided into three stages: • Firststage: basic education (nine years of schooling) • Secondstage: secondary vocational education (academic lyceums and professional colleges) • Third stage: higher education (in 1998, Uzbekistan introduced a two-level training of specialists with higher education—bachelor’s and master’s).

Admission of students in higher education institutions is conducted through state grants and fee-based contracts. Since 2001, credits for high school education have been available. After receiving a master's degree, one can continue their education (postgraduate, doctorate) to obtain academic degrees. Until 2012, postgraduate education in Uzbekistan consisted of two stages: postgraduate and doctoral studies. Study in graduate school was completed by a thesis defense and obtaining a Ph.D. degree in the field of specialty. Accordingly, the doctoral study was necessary for the thesis defense and obtaining a degree of doctor of science. Education at these levels was available fulltime, parttime, and as an applicant/ candidate to receive the relevant scientific degree. Preparation of candidates in Uzbekistan was conducted in 298 specialties and doctors in 60 specialties.

In accordance with the regulations on postgraduate study (doctorate) approved in Uzbekistan (August 9, 2007), preparing graduate and doctoral students included the following main types of education processes and research activities: • Self-study of scientific literature on the chosen specialty • Visits to relevant training sessions, lectures, tutorials, and laboratory sessions, and related subjects carried out by a scientific advisor, experienced professors, and other teachers • Conducting sessions with the students on behalf of the supervisor and participating in methodical work of the department • Theoretical trainings on chosen science subjects • Training in the specialty and related disciplines • Pedagogical work in the specialty • Independent research work in topics related to the thesis • Preparation and defense of a thesis

204 • 2015/16 Knowledge Sharing Program with Uzbekistan Institutions of higher education and research institutions were required to • ensure acceptance of candidates with the aptitude for research work on a competitive basis and provide a diploma of higher education or a master's degree; • approve the themes of scientific papers, work plans, and supervisors of postgraduates on the Academic Council; • provide graduate students with the necessary conditions for theoretical training and conduct practical research, appoint experienced scientists as supervisors, and ensure their scholarship payments in a timely manner; • monitor the activities of graduate students, and check and discuss the reports of scientific leaders regularly at the Academic Council.

Research and training of graduate students was made custom for each graduate student to plan, the disclosure of which is the independent research and educational work of a graduate student: the thesis.The individual plan includes a postgraduate candidate at least in the specialty, a list of all the scientific and educational work, a graduate student who is required to perform for the duration of his stay at graduate school, and the execution of work on the dissertation topic.

The basic preparation method of graduate student work is the following: • Study relevant scientific literature • Prepare written papers and reports • Present papers and reports for discussion at the department (department, sector, laboratories) and postgraduate academic conferences

In order to assist each graduate student with their research, the selected themeis approvedby the rector of the university or the research institute’s scientific director, doctors, or professors at the time of enrollmentunder the direction of the supervisor,a graduate student developshis or her individual plan and selects a postgraduate dissertation topic. The supervisor advises graduate students on their scientific work and monitors their approved individual plan, directs his research and teaching work, and is responsible for the management of postgraduate training in the specialty for quality performance of the thesis.

2.2. Recent Reforms of the Postgraduate Education System and Training of Doctoral Research Personnel

In order to improve the training system for scientific and scientific-pedagogical personnel of the highest qualification, a decreeof thepresident of the Republic of Uzbekistan No. PD-1426 was adopted on February 11, 2010. The decree allowed

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 205 the increased significance of postgraduate education in terms of status and funding in contrast to the previous system of postgraduate education, where the status of a postgraduate or a doctorate was at a level between the scientific employee at a research institution and a university student. Therefore, starting from November 10, 2010, graduate schools were named as the institute of intern researchers, and doctorate schools were named as the institute of senior researchers, which is consistent with the norms of scientific-research institutions in terms of status and content; i.e., the salaries of intern researcher aspirants of higher education and scientific-research institutions are equal to the basic salary of an intern researcher, and the salaries of senior researcher aspirants are equal to the salaries of senior researchers with a doctor of science degree.

Then, on January 1, 2013, fundamental reform of postgraduate education system was implemented in order to improve the training system of scientific and scientific-pedagogical staff of the highest qualification further. Following the priorities of the national program of staff training and the implemented economic and democratic reforms, the leading international experience and international standards of scientific personnel certification, as well as increasing the quality of science and the practical importance of dissertation research, conditions were created to realize the creative and intellectual potential of the youth in the single- stage system of postgraduate education with the defense and awarding of the doctor of science degree in accordance with generally accepted international requirements and standards. Such decision was made since the current two-stage system of scientific personnel certification (candidates and doctors of science) did not meet the modern international requirements adopted in developed countries.

The defense of the candidate’s thesis and receiving a scientific degree often became an individual aim, which was far away from the interests of science and scientific-technical progress, leading to abuses in various stages of preparation and defense. At the same time, the transition of the higher education process to the standards of undergraduate and graduate education made it redundant to defend the thesis and demanded the introduction of a single-stage system of postgraduate education, providing the defense of the thesis directly upon the award of the doctor of science degree.

With the introduction of a single-stage system of postgraduate education, unique conditions were created for the realization of the creative and intellectual potential of youth. In particular, according to the new requirements, those having a bachelor’s degree with no less than five years of work experience could be registered as independent aspirants. Apart from that, a new registration system of the doctoral theses was introduced, so the doctoral dissertation themes of senior researcher aspirants are developed beforehand by the scientific-based advisers on

206 • 2015/16 Knowledge Sharing Program with Uzbekistan the priorities of scientific and technological development directions, taking into account the aims and objectives of the governmental scientific and technological programs. These themes are then approved on a competitive basis by the academic councils of the higher education and research institutions. Such mechanism provides the sufficient funding of senior scientific personnel’s research, scientific equipment, as well as attraction of existing scientific potential of preparation of high qualification personnel. The approved topics for doctoral theses are reconciled with parent ministries and institutions of higher education and research institutions and are reviewed for their compliance with the priority areas of science and technology development, and the aims and objectives of governmental scientific- technical programs.

In order to provide expertise on the theses’ themes, the members of interdepartmental scientific and technical councils, leading scientists of the Academy of Sciences, Ministry of Health, Ministry of Agriculture and Water Resources, Ministry of National Education, Higher Attestation Commission of Experts, as well as other relevant ministries and agencies are involved. Each topic is reviewed for its compliance with the priority areas of science and technology development, governmental scientific-technological programs, relevance and novelty, matching the selected scientific specialization, as well as duplication.

Thus, in 2013, the country formed a database of themes in the context of doctors of science (scientific advisers) giving their place of work, scientific specialization, ministries, and agencies. Overall, there are 5,207 themes registered, out of which 1,665 doctoral thesis themes are dedicated for institutes of senior researcher aspirants and 3,542 are for self-researching.

Today, the new single-stage system of postgraduate education in Uzbekistan has a majority of the Bologna Process elements. However, its main differences from the existing world systems, including the Western system, are the following: • Before the admission exams for the doctoral program, the applicant must pass a test on the potential to conduct research activities. • During the competition, doctoral candidates must publish the results of his/her research in at least two international journals with high ratings and have at least two individual public performances, one of which should be carried out at international scientific practical conferences. • The thesis defense boardsshould be no more than four specialties or fields of science. • The boards are divided into several areas, and every area has its degree (20 directions). (The Anglo-Saxon system has four directions.) • The preservation of the previous order of assigning the academic degree of associate professor (at least five years of scientific-pedagogical experience) and

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 207 professor (at least ten years of scientific–pedagogical experience).

Thus, the created system today needs a qualitative increase of its status. The new order requires a smooth transition without any losses of scientific potential. Today, about half of research institutions, including university lecturers with doctor of science degrees, are 60 years old or older. The majority of those having a scientific degree is located in the capital, which greatly undermines the potential of regional universities. However, the quality of education in the country’s universities suffers due to insufficient lecturers with adoctor of science degree obtained abroad. Every year, dozens of young people come back to the motherland upon completing different doctoral programs. However, the accounting of such staff started only in 2015, though the country has not yet developed a full-fledged mechanism of their involvement in universities, as well as programs to encourage the return of those who are abroad.

Next, we review the current state of postgraduate education. Before the transition to a single-stage system of postgraduate education in 2012, the total number of trainees and researchers (postgraduate) and institutes of senior researchers (D.S.) were, respectively, 2,626 and 183 people. At the same time, there were 61 high schools and 65 research institutes and centers. However, the reforms in the field of postgraduate education starting in 2010 contributed to improving the quality of scientific work performed on the decline reflected the proportion of graduates in a timely manner, that is, within three years. Thus, the number of Ph.D.’s defended in 2005–2012 reduced 3.8 times and doctorates three times (see [Figure 4-1]).

[Figure 4-1] The Number of Ph.D's Defended in 2005-2012

25.0 22.4

20.0 14.5

15.0 10.7 15.7 14.7 10.0 10.7 4.2 5.0

3.9 0.0 2005 2010 2011 2012

propotion of defended candidate's degree (PhD) to the number of graduates Pfopotion of defended doctorate's degree (Dsc) to the number of graduates

Source: The State Committee of the Republic of Uzbekistan on Statistics.

208 • 2015/16 Knowledge Sharing Program with Uzbekistan To date, Uzbekistan has 126 institutions that prepare D.S. in 20 fields of science. In connection with the transition to a single-stage system in 2013, the total number of senior researcherswas 1,259; 429 senior researchers were in the area of "science," while there were 830 senior researchers in the field of "education."

The admission quota in 2014 was set at 650 seats. This range of specialties from 286 covered 208 specializations. Thus, at the end of the competition for the first year, the Institute of Senior Researchers accepted 470 persons (or 72.9% of the total quota), of which 160 seats were for “science” and 310 seats were for “HRtraining” (see

). However, 47.7% of the total received a Ph.D. and 52.3% an academic master's degree. The highest proportion of applicants was age 41–45 years (see [Figure 4-2]).

[Figure 4-2] Age Structure of Accepted Senior Researchers in 2014

24.1 (Unit: % of all) 22.5 21.2

17.3

11.8

3.0

under 31 years 31-35 years 36-40 years 41-45 years 46-50 years 51-60 years

Source: Committee for Coordination Science and Technology Development under the Cabinet of Ministers of the Republic of Uzbekistan.

Compared to previous years, there was an increase of reception in "technical sciences" and "natural sciences" in 2014. For example, technical sciences accepted 79 more people than in 2013. The share of "physical and mathematical sciences" increased 1.3 times (accepted SR 44), and "architecture" made 4 times more SR in 2014 (instead of one person released in 2013, our SR were accepted).The largest number of SR taken for the exact and natural sciences was 235 persons (49.6% of the total). In the humanities, 160 SR(33.8% of the total) were taken, and 79 SR (16.7% of the total) were taken in the technical sciences.

To date, modern requirements for doctoral dissertations in Uzbekistan have special conditions. One is to develop new theoretical propositions that can reflect a certain achievement in the development of the relevant branches of science. At the same time, research must have practical value, i.e., information about solving the urgent problems of the economic sectors and the social and political spheres.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 209 Therefore, the main results of the study are to be published in not less than 15 publications, ten of which must be journals including two foreign journals, and two articles in the proceedings of international scientific conferences, one of which must be published in the proceedings of a conference held in foreign countries. At the same time, theses on the socio-economic sciences and humanities should be publishedasmonographs.

For admission to the thesis defense, the applicant must pass qualifying exams for assessment. Applicant exams are established on the disciplines of "the recent history of Uzbekistan," "foreign language," and the specialty in accordance with the thesis’ theme and the sciences. For example, a doctoral student in macroeconomics must pass exams in the following disciplines: • The recent history of Uzbekistan • Foreign language • The idea of independence, and economic, social, political, spiritual, and scientific foundations of a democratic society • Mathematical modeling and mathematical statistics • Economic theory • Macroeconomics

Qualifying exams are defined by the SAC (Supreme Attestation Commission) organizations with educational, scientific, and organizational structure (thedepartment, office, and laboratory) in relevant areas of science.

In general, a qualifying examination in the specialty includes the following: • Determination of the applicant’s level of theoretical and professional training, their knowledge of the history of the formation and development of the science, the general concepts and methodological issues, primary sources, the major theoretical and practical problems of this scientific field, and awareness of the scientific literature, including modernforeign publications related to the fieldand on modern methods of research. • The ability of the applicant to show knowledge of the current state, problems, and prospects of development of the field, and determine the novelty and importance of the research.

210 • 2015/16 Knowledge Sharing Program with Uzbekistan

Key Indicators of Postgraduate Education (Doctoral) in Uzbekistan

(Unit: %)

Share of Share of doctoral Specialty of doctor's degree students in the students science group Math 28.1 Physics Mechanics 11.6 and math 5.2 Astronomy 3.3 science Physics 57.0 Information technology, management, 10.5 and computer graphics Machine building and engineering,processing materials in 9.8 machine building, metallurgy, andaviation technology Instrument making, metrology, and information-measuring devices and 3.3 systems Radio engineering and communication 2.5 Technical Energetics and electrical 12.0 science engineering,technology electrification of 11.6 agricultural production,and electronics Materials technology,textile products, and 8.7 light industry Mechanization of agricultural production 6.9 technology Transport 5.1 Building 4.7 Human activity safety 1.4 Agronomy 32.6 Animal husbandry 2.9 Economic theory 6.7 Macroeconomics 4.5 Economics of industry 3.4 Economics of agriculture 8.1 Economics of service industries 4.8 Econometrics and statistics 2.8 Economic Finance andaccounting 15.4 science 28.9 Economics of business and small business 0.6 World economy 7.3 Demography andeconomics of labor 8.1 Marketing 4.2 Regional economy 3.7 Management 16.9

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 211

Continuted

Share of Share of doctoral Specialty of doctor's degree students in the students science group Obstetrics and gynecology 5.5 Endocrinology 3.2 Internal illnesses 6.1 Cardiology 4.9 Hygiene 4.1 Pediatrics 8.1 Dermatology and venereology 4.1 Medical Neurology 4.1 14.9 sciences Stomatology 3.5 Traumatology and orthopedics 3.5 Surgery 9.9 Neurosurgery 2.9 Public health and healthcaremanagement 2.9 Pediatric surgery 3.2 Anesthesiology and intensive care 3.5 Other 30.5 Law science 6.0 Pedagogical science 6.4 Chemical science 6.4 Others 33.7 TOTAL 100.0

Source: Committee for coordinatian Science and Technology Development under the Cabinet of Ministers of Uzbekistan.

212 • 2015/16 Knowledge Sharing Program with Uzbekistan 3. Postgraduate Education in South Korea

3.1. History of Postgraduate Education in South Korea

The developmenthistory of postgraduate education in South Korea is outlined in

. It began in 1953with graduate school regulations that were enacted following instructions from the Ministry of Education. Based on the policies, the Graduate School of Public Administration and the Graduate School of Public Health were established in Seoul National University in 1959, marking the start of postgraduate education. The period of 1953 to 1965 was considered the introductory period of graduate school policies. A total of 37 graduate schools were established, but they mainly offered master’s degree programs, and doctoral degree programs were not properly administered.

The period of 1966 to 1990 is considered the policy settlement period. As undergraduate studies developed, the size of graduate schools expanded as well. In particular, in 1971 when the Korea Advanced Institute for Science and Technology was established as a university centered on postgraduate education, doctoral degree programs started to develop in full scale. In addition, supporting policies were executed, such as giving military privileges to graduate students and supporting overseas research for doctoral students.

The period between 1991 and 2000 is the period of institutional reform and establishment of legislative measures. There were four main characteristics of this period. First, quantitative development occurred. The quantity of postgraduate education increased, reflecting the expansion of high-quality manpower in Korean society. There were 298 graduate schools and 86,911 graduate students during this period, and the numbers rose to 829 graduate schools and 229,437 graduate students by 2000.

Second, specialized graduate schools were introduced. Graduate schools were categorized into general, specialized, and special graduate schools. While general graduate schools focus on studying basic theories and conducting advanced academic research, studying practical theories and conducting research in the professional career field are the main purposes of specialized graduate schools, and special graduate schools aim to provide continuing education to workers or regular adults. Furthermore, integrated master’s and doctoral degree programs were introduced, making it possible to continuously receive master’s and doctoral education.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 213 Third, the support for graduate schools was actively promoted as part of a national project. Projects were initiated that supported high-performing research centers in the field of science and engineering such as the Science Research Center and the Engineering Research Center. In the fields of humanities and social science, the BK21(Brain Korea 21) project was implemented to provide financial support for exemplary postgraduate education.

Lastly, legal measures were established for the development process. Before this period, graduate school regulations were based on presidential decrees or instructions from the Ministry of Education. Graduate school regulations (presidential decrees) were reorganized when the Higher Education Act was enacted in 1997 and the Enforcement Decree of the Higher Education Act was established in 1998. The regulations on operation, such as the establishment conditions for graduate schools and faculties, number of students, and degree conferment, were based on the acts.

From 2001 to present day is regarded as a period in which the graduate school policies developed and financial aid strengthened. The speed at which graduate schools expanded slowed substantially compared to the previous period, with 1,197 schools established up until 2015. The number of graduate students was 333,478 in 2015, among which 72,258 were doctoral students. A key feature of this period is that the graduate schools that promoted quantitative expansion have initiated qualitative growth. The bills on postgraduate education that were enacted during the previous period were revised, and the graduate school establishment and operation conditions were reinforced.

Additionally, the schools were developed to have international competitive power, and more financial support was given to meet the international standards.

214 • 2015/16 Knowledge Sharing Program with Uzbekistan

Development History of Korea’s Graduate School Policies

Changes in establishment of major graduate Number of graduate Period schools, policies, and legislation schools

1959: Graduate School of Public Administration and Graduate School of Public Health established at Seoul Graduate schools: 37 Introduction National University Graduate school (1953–1965) 1963: Graduate School of Education established at Seoul students: 3,482 National University

1971: Korea Advanced Institute for Science and Technology established Graduate schools: 298 Settlement Supporting policies such as military privileges(1973) and Graduate school (1966–1990) research support for overseas post-doc positions(1982) to students: 86,911 attract excellent students were implemented

Various legislation on graduate schools were enacted (1998 Institutional Enactment of Higher Education Act) reform and Promotion of specialization and diversification of graduate Graduate schools: 829 establishment schools Establishment of graduate schools approved > Graduate school of legislative quantitative increase of graduate schools students: 229,437 measures Increase in financial support for graduate school education (1991–2000) such as BK21, etc.

Policy New establishment of graduate schools and reinforcement of development management requirements Graduate schools: 1,197 and Settling of policy on specialized graduate schools (medicine, Graduate school financial aid dental education/oriental medicine/law/MBA) students: 333,478 strengthening Promotion of graduate school internationalization (72,558 students in the period Expansion of financial support projects for graduate schools doctoral degree program) (2001–2015) (BK21, WCU, GPF)

Source: Lee et al. (2013)

3.2. Current Situation of Postgraduate Education in South Korea

show the number of schools, enrolled students, and faculty members in South Korea’sdoctoral programs as of 2015. There were 1,197 schools offeringdoctoral programs. One of the key features in South Korea is that private institutions organizea majority of the doctoral programs; 80% of schools are private institutions (957/1,197=79.9). This suggests that the private sector played the critical role in developing the postgraduate education system.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 215

Number of Schools, Enrolled Students, and Faculty Members

Schools Enrolled students Faculty members

Total 1,197 72,558 8,551

National 231 26,737 2,842

Public 9 489 50

Private 957 45,332 5,659

Source: Statistical Yearbook of Education 2015, South Korea.

Among the enrolled students, the most popular major is engineering(26%)(see

). The second most popular majoris social science(19.3%). In 2015, 26,154 students out of 41,429 applicantswere admitted into doctoral courses. The overall ratio of entrants to applications is 0.63. The fields where their entrance rates were higher than the average were engineering, natural science, and medical science. There were 13,077 doctoral degrees awarded in 2015.

Number of Enrolled Students, Applicants, Entrants, and Degrees Awarded

Enrolled Applicants Entrants Degrees awarded students

Total 72,558 41,429 26,154 13,077

Humanities 8,692 5,095 3,090 1,272

Social Sciences 13,983 9,234 5,362 2,518

Education 5,037 3,169 1,840 826

Engineering 18,861 9,805 6,571 3,332

Natural Sciences 12,166 6,550 4,192 2,282

Medical Sciences 9,672 5,168 3,617 2,056 and Pharmacy

Arts an Physical 4,147 2,408 1,482 791 Education

Source: Statistical Yearbook of Education 2015, South Korea.

shows the ages of enrolled doctoral students and new Ph.D.’s for 2015. Almost half of doctoral students were age 33 or older and 31.5% were age 28 or younger. However, the age distribution varied significantly by field. In the fields

216 • 2015/16 Knowledge Sharing Program with Uzbekistan of engineering and natural science, more than half of the students were age 28 or younger. On the contrary, more than 70% of students in humanities, social sciences, and education were age 33 or older. The students were usually in their 30s when their degrees were awarded. Only 4.3% of the students were age 20 or younger when they earned their Ph.D. Even in the fields of engineering and natural science, less than 10% earned their Ph.D. at age 28 or younger.

Age of Doctoral Students

Age 28 or younger Age 29–32 Age 33 or older

Enrolled students

Total 31.5% 18.3% 50.1%

Humanities 11.8% 15.8% 72.4%

Social Sciences 11.1% 13.7% 75.2%

Education 8.9% 19.0% 72.2%

Engineering 52.1% 17.7% 30.3%

Natural Sciences 58.8% 18.3% 22.9%

Medical Sciences and Pharmacy 22.7% 26.2% 51.1%

Arts and Physical Education 16.4% 23.2% 60.4%

Degree Awarded

Total 4.3% 22.5% 73.3%

Humanities 1.1% 7.4% 91.5%

Social Sciences 1.1% 9.1% 89.8%

Education 2.1% 8.4% 89.6%

Engineering 6.8% 34.0% 59.2%

Natural Sciences 8.4% 39.0% 52.5%

Medical Sciences and Pharmacy 3.1% 19.4% 77.5%

Arts and Physical Education 1.9% 15.5% 82.6%

Source: Statistical Yearbook of Education 2015, South Korea.

shows the academic performance during the doctoral studies. On average, doctoral students published 1.62 papers in academic journals as main authors and 1.75 papers as co-authors. They published mainly in domestic journals:

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 217 0.71 in KCI journals and 0.21 in other journals. (KCI refers to the Korea Citation Index, which is a journal quality control system managed by the National Research Foundation of Korea). There were 0.7papers written by doctoral students that were published in international journals. The students in integrated master’s and Ph.D. degree programs published fewer papers during their studies: 0.93 papers as the main authors and 1.27 papers as co-authors. However, interestingly, there is not much difference between the number of papers written by doctoral students and integrated degree students that were published in renowned international journals such as SCI(E), SSCI, and A&HCI. It was uncommon for students to write a book during their doctoral course. Only 0.31 books were written by doctoral students and integrated degree students wrote an average of 0.14 books.

During their studies, doctoral students participated in academic conferences several times. Doctoral students made presentations 2.69 times at domestic conferences and 1.39 times at international conferences. Integrated degree students made presentations 2.08 times at domestic conferences and 1.05 times at international conferences. Overall, doctoral students showed better academic performance than integrated degree students. However, if quality was considered, the gap would be narrower. The number of papers published in international journal would be the evidence.

Academic Performance of Doctoral Students

Domestic International Academic journal KCI Others SCI(E)/SSCI/A&HCI Others Total (main author) Doctoral degrees 0.71 0.21 0.56 0.14 1.62 Integrated master’s and Ph.D. 0.24 0.05 0.55 0.09 0.93 degrees Academic Journal KCI Others SCI(E)/SSCI/A&HCI Others Total (co-author) Doctoral degrees 0.72 0.13 0.79 0.11 1.75 Integrated master’s and Ph.D. 0.26 0.04 0.87 0.1 1.27 degrees Books Doctoral degrees 0.31 0 0.31 Integrated master’s and Ph.D. 0.14 0 0.14 degrees Conference presentations Doctoral degrees 2.69 1.39 4.08 Integrated master’s and Ph.D. 2.08 1.05 3.13 degrees Source: Lee et al. (2013)

218 • 2015/16 Knowledge Sharing Program with Uzbekistan 3.3. Key Features of Postgraduate Education in South Korea

In a broader sense, the development of South Korea’s postgraduateeducation was led by the government based on legislation. Detailed cases and content are as follows.

First of all, the types of graduate schools are provided in the law. Graduate schools that can confer doctoral degrees are specified as general graduate schools and specialized graduate schools, and the degree title is also defined. Specific details are given in

Types of Graduate Schools that Can Confer Doctoral Degrees

Specialized General graduate Relevant regulations graduate school school Article 29-2 of the Higher Education Act Article 29-2 (Types of Graduate Schools) (1) Graduate schools shall be classified as follows according to their main educational purpose: 1. General graduate schools: Graduate schools, Practical theories Study basic theories the main educational purpose of which Establishment and research and advanced is to learn basic theories of studies and to purpose in professional academic research conduct advanced academic research. career field 2. Specialized graduate schools: Graduate schools, the main educational purpose of which is to apply practical theories required for training of human resources in the field of specialized vocations and to conduct research and development related thereto. Article 45 of the Enforcement Decree of the Higher Education Act Article 45 (Conferment of Degrees at Graduate School Courses) General graduate schools confer academic degrees, and specialized graduate schools Degrees Professional and special graduate schools confer technical Academic degree conferred degree degrees provided that specialized graduate schools (excluding master's degree courses of specialized graduate schools for the purpose of training medical doctors or dentists) may confer academic degrees as determined by school regulations, when it is deemed necessary for scientific fields. Researchersand Career Specialized jobs professors

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 219 The basic principles on establishing graduate schools and the number of students admitted are also specified in the law. Following the regulation, each school can decide its own school size. The contents are given in [Box 4-1].

[Box 4-1] Regulations on Establishment of Graduate Schools and Number of Students Admitted

< Enforcement Decree of the Higher Education Act > • The fixed number of admitted students for degree courses at graduate schools shall be determined by school regulations of each graduate school, and it shall be determined within the extent of the number of students which is determined according to school buildings, school land, school personnel, and basic property for profit making under the Regulations for Establishment and Operation of University (Article 30, Section 1). • Matters necessary for the establishment standards and operation of educational-research- industrial cooperative courses shall be determined by the Minister of Education, Science and Technology (Article 23, Section 2).

< Regulations for Establishment and Operation of University, Article 2-2, Section3> • Detailed standards on establishment of graduate schools and others (graduate schools, faculty, majors, interdisciplinary programs) shall be determined by the Minister of Education, Science and Technology

The ground rule for admission is also regulated by law. The contents are given in [Box 4-2].

[Box 4-2] Regulations on Admissions for Graduate School

Article 33 (Qualifications for Admission) ③ Those who hold a bachelor’s degree or those who have been recognized as having equivalent to or higher academic background by acts and subordinate statutes shall be qualified to enter master’s degree courses and combined courses for master’s degree and doctor’s degree. ④ Those who hold a master’s degree or those who have been recognized as having equivalent to or higher academic background by acts and subordinate statutes shall be qualified to enter doctor’s degree courses.

The key details on the management of the graduate school are specified in the law. It contains the details necessary for degree programs, such as the terms of the school years and semesters, the number of school days, and credit hours per credit (see [Box 3-3]).

220 • 2015/16 Knowledge Sharing Program with Uzbekistan [Box 4-3] Regulations on Managing a Graduate School

< Higher Education Act > Article 31 (Term of School Year) ① The term of the school year for universities and graduate schools is as given in subparagraphs. … 3. Not less than two years in the case of master’s degree courses and doctor’s degree courses 4. Not less than four years in the case of any combined course for a master’s degree and doctor’ degree ② Notwithstanding the provisions of paragraphs (1) and (2), the term of the school year referred to in paragraphs (1) and (2) may be reduced for any person who has earned more credits than those as determined by school regulations under the conditions as determined by the Presidential Decree.

< Enforcement Decree of the Higher Education Act > Article 10 (Semesters) The semesters referred to in Article 20 (2) of the act shall be two to four semesters every school year. Article 11 (Number of Schools Days) The number of school days under Article 20 (2) of the act shall be not less than 30 weeks every school year. Article 14 (Credit Hours per Credit) The credit hours per credit in courses of study referred to in Article 21 (2) of the act shall be not less than 15 hours every semester.

As shown in [Box 4-4], the principles on the presentation and examination of dissertation are based on the law.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 221 [Box 4-4] Regulations on Dissertations

< Enforcement Decree of the Higher Education Act > Article 44 (Presentation and Examination of Dissertations) (1) Any person who intends to obtain a master's degree or a Ph.D. degree shall take the required credits, pass certain examinations, and then present a dissertation for a degree as determined by school regulations,provided that for a technical degree of a master's degree, other methods may be applied as determined by school regulations. (2) The examination of a dissertation for a degree shall be made by examiners (not less than three persons for a master's degree and not less than five persons for a Ph.D. degree) selected through deliberation by a graduate school committee referred to in Article 24, from among school teachers or authorities of the academic circle.

Article 45 (Examination Fees of Dissertations for Degrees) The head of a university or college, industrial college, or teachers' college may collect examination fees equivalent to the actual expenses from the presenter of a dissertation for a master's degree or a dissertation for a Ph.D. degree through deliberation by a graduate school committee.

Article 50 (Registration of Those Who Have Completed Courses) (1) Any person who has completed a degree course at a graduate school may register for the graduate school to make preparations for dissertation or do otherwise under the conditions determined by school regulations. (2) The term "person who has completed a degree course" in paragraph (1) means any person who has passed the term of school years under Article 31 of the act and obtained the required credits determined by school regulations.

Article 51 (Public Announcement of Dissertations for Ph.D. Degrees) Any person who has obtained a Ph.D. degree shall publicly announce his/her Ph.D. degree dissertation within one year from the date on which he/she received it, as determined by the Minister of Education, Science and Technology,provided that this shall not apply where the Minister of Education, Science and Technology deems that it is not appropriate to publicly announce it.

The acknowledgment range and standards for the faculty’s research productivity have been established based on notification from the Ministry of Education, Science and Technology (order). The details are given in [Box 4-5].

222 • 2015/16 Knowledge Sharing Program with Uzbekistan [Box 4-5] Acknowledgment Range and Standards for Research Productivity

Notification on Research Productivity and Recognition Range of Faculty for Establishment of Doctoral Degree Program (Ministry of Education, Science and Technology Notification No. 2011-34)

Article 2 (Recognition Range and Details for Research Productivity) ① The recognition range of research published in domestic and international journals is as outlined in the subparagraphs. 1. Domestic academic journals: Journals registered with the National Research Foundation of Korea, journals expected to be registered 2. International academic journals: SCI, SSCI, A&HCI 3. International public journals: SCIE, SCOPUS

② A research paper published in domestic academic journals is recognized as one research for research productivity. A paper of joint research follows the regulations given in the following subparagraph. 1. 2/(n+2) papers are recognized for main authors and corresponding authors; 1/(n+2) papers are recognized for co-authors. 2. “n” refers to the total number of authors indicated in the paper, and the calculation result is rounded up to the third decimal point.

③ A research paper published in international academic journals, as given in Section 2, is taken as double the research recognition; a research paper published in international public journals, as given in Section 2, is taken as 1.5 times the number of research recognitions.

Article 3 (Recognition Range and Details for Writing Capability) ① Restricted to scholarly academic books with ISBM for own work and translated work. Book reviews, scholarly journals, writings for academic conferences, revised and enlarged addition and general educational books are excluded. ② One’s own work, as given in Section 1, is recognized as one research product when written independently and 1/n research product when written jointly (“n” refers to the number of authors and co-authors indicated on the book, and the calculation result is rounded up to the third decimal point). ③ Books at the level of international standards published in a foreign language are taken as 1.5 times the number research recognitions, as given in Section 2. ④ As given in Section 2, translated books are taken as 0.7 times the number of research recognitions; compilations or translated compilations are taken as 0.4 times the number of research recognitions

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 223 3.4. Three Cases of Doctoral Programs in South Korea

We present actual cases of doctoral programs in Korea to see how the programs operate. The cases are outlined in the order of different stages, from admission, curriculum, thesis application qualification exam, and writing a dissertation. Once the students are selected to enroll in the program, they acquire the necessary knowledge(common departmental knowledge and knowledge from each major) for the doctoral degree by completing coursework. During the thesis application qualification exam, the students are tested on the materials learned to see whether they have acquired enough knowledge to write a dissertation. Once the students pass the exam, they can start drafting the dissertation. Dissertation evaluation is in two stages: first, the dissertation proposal is evaluated, and once the proposal has been approved by the evaluation committee, a final evaluation will be given. Normally, the evaluation period is arranged by the departments. The examiners as well as the graduate students of the relevant faculty attend dissertation presentations and participate in a discussion.

The doctoral degree programs of Seoul National University’s Department of Economics, Department of Physics & Astronomy, and Department of Computer Science and Engineering have been chosen as case studies. The Department of Economics and Department of Physics & Astronomy offer doctoral degree programs as well as integrated master’s and doctoral degree programs separately. In this case, both degree programs are given.

Doctoral Degree Programs of Seoul National University (Department of Economics, Department of Physics & Astronomy, and Department of Computer Science and Engineering)

3.4.1. Admissions

Department of Economics Doctoral Degree Program Prerequisite for application Master's degree Closing date for application Middle of May/middle of October Screening date for application Beginning of June/end of October Quota for the program 19 (including the master's and doctoral integrated program) or less Application procedure English (TEPS or TOEFL), document examination, oral exam, and interview Documents required Lists of student records, research plan in the school's format provided, two recommendation letters (applicants who are graduates from the department of economics in SNU are exempted recommendation)

224 • 2015/16 Knowledge Sharing Program with Uzbekistan Department of Physics & Astronomy

Students that wish to enroll in the master’s program for physics offered by the Department of Physics & Astronomy of Seoul National University can apply to the integrated master’s and doctoral degree program that selects students in January and August. Those students who have earned a master’s degree in physics from Seoul National University or other universities can apply to the doctoral degree program in May and October. The number of students selected for the doctoral program is less than 25% of the number of students selected for the integrated master’s and doctoral degree, and fewer students are selected during the application process of the second semester compared to the first semester.

Doctoral Degree Program

Prerequisite for application Students who have completed a master’s program in physics in universities in Korea and abroad or those who will complete before the admission date.

Application period End of April/end of October

Quota for the program 56 students during the first semester (including 47 students for the integrated master’s and doctoral degree program), and 36 students during the second semester (including 26 students for the integrated master’s and doctoral degree program)

Application procedure English (scores over 551 for TEPS, 210 for TOEFL CBT, and 550 for TOEFL PBT), document screening, interview, and oral examination

Documents required Transcripts for bachelor’s and master’s degree programs, personal statement, and letters of recommendation (adviser from master’s and doctoral program)

Integrated Master’s and Ph.D. Degrees

Prerequisite for application Enrolled students who have completed two semesters (18 credits) from a master’s program offered by the Department of Physics & Astronomy (students who have completed or are expected to complete are excluded), possess a CGPA over 3.3 for the courses taken from the graduate school, and have passed undergraduate qualification exams

Evaluation criteria Score derived using undergraduate qualification exam score and first year GPA of the graduate school

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 225 Department of Computer Science and Engineering Doctoral Degree Program

Eligibility of application International applicants Hold a master's degree or is considered by the admission committee to have an acceptable intellectual competence at the level of someone holding an equivalent or higher degree. Not a citizen of Korea. Parents are not citizens of Korea.

Applicants of Korean origin Received entire elementary, middle school, high school, and undergraduate education outside of Korea at a comparable and equivalent level of those provided in Korea. Hold a master's degree or is considered by the admission committee to have an acceptable intellectual competence at the level of someone holding an equivalent or higher degree.

Application criteria · Based on academic achievements and potential, as well as personal accomplishments · Based on number of records of past studies

Preparation · Documents for master’s degree applicants · Supplementalmaterials for master’s degree applicants · Certificate proving English or Korean proficiency · Agreement for verification of academic record

226 • 2015/16 Knowledge Sharing Program with Uzbekistan Department of Economics Doctoral Degree Program

Requirements for acquiring · Registration for four or more semesters the degree · 60 or more finished credits including mandatory major courses and credits acquired during the master’s course · Average GPA of 3.0 or higher during the course · Passing of the Thesis Application Qualification Exam · Passing of the thesis

Required semesters · At least four semesters should be completed to acquire the Ph.D. degree. · Registration period cannot exceed six years. Temporary absence is not included in the registration period and cannot exceed six semesters in total (a temporary absence of six consecutive semesters is available, but one has to submit a request for temporary absence annually). Periods of military service are not included in the temporary absence period.

Curriculum Necessary credits 1. Credits needed to acquire the Ph.D. degree are 60 or more finished credits including mandatory major courses and credits acquired during the master's course, courses with grades of 0.7 or higher, and Reading and Research or Seminar courses with an S grade. 2. Credits completed during the master's course are automatically accepted as the necessary credits (up to 24 credits) to acquire the Ph.D. degree. If the completed credits of the master's degree exceed 24 credits among courses with grades B0 or higher, up to 36 credits can be accepted for the Ph.D.course credits. If students wish to incorporate previous credits, they must do so immediately after registering for the first semester of the Ph.D. course. 3. Before entering the Ph.D. course, up to 24credits finished by other master’s or Ph.D. courses at other universities or departments will be accepted.

Enrollment credits 1. Up to 12 credits are available for enrollment every semester. 2. The mandatory major courses are as follows: Studies in Microeconomics, Studies in Macroeconomics, Studies in Statistics for Economists, Further Studies in Microeconomics, Further Studies in Macroeconomics, Studies in Econometrics 3. Only one Reading and Research or Seminar course is available per semester and up to nine and six credits are available for Reading/ Research and Seminar courses, respectively. 4. In order to accept courses taken in graduate courses of other departments, they must be previously accepted by the dean before enrollment.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 227 Courses offered Required Studies in Microeconomics Studies in Macroeconomics Studies in Statistics for Economists Advanced Microeconomics, Advanced Macroeconomics Studies in Econometrics Optional Studies in the Theory of Money and Finance Studies in Industrial Economics Studies in Labor Economics Studies in Western Economic History Studies in Korean Economic History Studies in Public Economics, Studies on the East Asian Economies Studies in International Trade Studies in International Monetary Economics Studies in Economic Growth Studies in Industrial Organization Studies in Applied Macroeconomics Advanced Studies in Econometrics Advanced Studies in Industrial Organization Advanced Studies in Korean Economic History Studies in Technology and Development Economics Studies in Corporate Organization and Growth Studies in International Economics Seminars in Econometric Analysis of Korean Economy Studies in Methodology of Economics Studies in Comparative Economic History Studies in Economics of Organization and Technology Analysis of Public Policies, Topics in Applied Microeconomics Topics in Economic History Advanced Economic Theory Topics in Microeconomics Topics in Macroeconomics Topics in Econometrics Topics in Money and Finance Topics in International Monetary Economics Topics in Public Economics Topics in Economic Growth Topics in Industrial Organization Topics in Corporate Organization and Economic Systems Studies in Stock, Bonds and Financial Derivatives Studies in History of International Economy Studies in Population and Economy Seminars on Economics of Knowledge and Technology Studies in Financial Economics Topics in Financial Economics Studies in Applied Financial Economics Studies in Mathematical Financial Economics Topics in Mathematical Financial Economics Studies in Computational Economics Studies on Economic Transition and Economic systems Studies in Applied Econometrics Topics in Empirical Industrial Organization Studies in Growth and Transition Empirics Advanced Topics in Econometrics: Time Series Analysis, Reading and Research Studies in Behavioral Economics Topics in Development Economics

228 • 2015/16 Knowledge Sharing Program with Uzbekistan Department of Physics & Astronomy Doctoral Degree Program

Required number of credits Over 60 credits (including credits earned during a master’s program), with at least 39 credits (for theoretical physics major) or 36 credits (for experimental physics major) should be obtained from lectures and subjects

Number of credits registered Within 12 credits per semester

Curriculum structure · Required courses: Four courses (12 credits) on Classical Mechanics, Electrodynamics 1, Quantum Mechanics 1, and Statistical Mechanics. Students who have already taken the courses in a bachelor’s or master’s program do not need to take the course again. · One class on research paper study can be taken per semester (12 credits are accepted until completion). · Maximum of 21 credits (24 credits for experimental physics major) can be obtained from classes on special research on physics, including classes on departmental thesis research. · Regarding elective courses, a maximum of two classes (six credits) that are taken from other universities (or other departments) are acknowledged. Additionally, one more class (three credits) can be acknowledged but a statement of reasons from the adviser should be submitted to the head of department prior to course registration. · Acknowledgment of total master’s/doctoral credits: When over 24 degrees have been earned from the master’s program and proceed to the doctoral program, the excess credits will be acknowledged in the total number of credits through request taken at the beginning of the first year (beginning of March or September). · Degree will be given when the total GPA and GPA from major subjects both exceed 3.0.

Offered courses Condensed Matter Physics 2 (Doctoral Program Only) Atomic Physics Advanced Topics in Condensed Matter Physics 2 Advanced Topics in Applied Physics2 Biological Physics String Theory

Integrated Master’s and Doctoral Degrees

Course registration Students selected for the integrated master’s and doctoral degree program are recognized to be in the doctoral program once they take 12 credits per semester, complete over four semesters including the master’s program, and receive over 24 credits. Also, the requirements below should be satisfied to complete the program.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 229 Required courses · Required courses: Four courses (12 credits) on Classical Mechanics, Electrodynamics 1, Quantum Mechanics 1, and Statistical Mechanics. Students who have already taken the courses in a bachelor’s or master’s program do not need to take the course again. · One class on research paper study can be taken per semester (total credits for research paper study cannot exceed 18 until completion of doctoral degree program). · Maximum of 21 credits (24 credits for experimental physics major) can be obtained from classes on special research on physics including classes on departmental thesis research. · Regarding elective courses, a maximum of two classes (six credits) that are taken from other universities (or other departments) are acknowledged. Additionally, one more class (three credits) can be acknowledged, but a statement of reason from the adviser should be submitted to the head of department prior to course registration. · Acknowledgment of total master’s/doctoral credits: When over 24 degrees have been earned from the master’s program and proceed to the doctoral program, the excess credits will be acknowledged in the total number of credits through request taken at the beginning of the first year (beginning of March or September). · The degree will be given when the total GPA and GPA from major subjects both exceed 3.0. · Students that are enrolled in the integrated master’s and doctoral degree program can earn a master’s degree once the requirements for completion are met (including thesis submission).

Courses offered Introduction to Departmental Research Activities (common with Doctoral Quantum Mechanics 1 Degree Program) Electrodynamics 1 Classical Mechanics Advanced Laboratory Condensed Matter Physics 1 Basic Nuclear and Particle Physics Laser Physics Phase Transitions and Critical Phenomena Quantum Field Theory 1 Advanced Topics in Applied Physics 1 Advanced Topics in Condensed Matter Physics 1

Courses offered Statistical Mechanics (Master’s Program, Quantum Mechanics 2 Integrated Master’s and Nuclear Physics Doctoral Program) Electrodynamics 2 Applied Computational Physics Particle Physics Quantum Field Theory 2 Selected Topics in Physics Advanced Topics in Nuclei and Particles 2 General Relativity Mathematical Physics Physics of Complex Systems

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Course of Study Doctoral Program: 2–6 years

Required number of credits · Over 36 credits for the doctoral program, over 60 credits for the integrated master’s and doctoral degree program · The degree will be given when the total GPA and GPA from major subjects both exceed 3.0, but completion is still possible even if the GPA is below 3.0 under the student’s request. In this case, the student cannot register as a research student and submit a master’s thesis, so graduation is not possible.

Course registration · The number of credits registered cannot exceed 12 credits per semester. · Other than classes that are specified by the bachelor’s/master’s/ doctoral degrees (military science, research paper study, etc.), classes with the same title (including classes completed within a semester/ year) cannot be taken twice. Classes that are categorized with “Ⅱ” with a different subtitle, however, are recognized as different subjects, and credits for both classes are recognized. Re-completion is not possible. · Regulations on course registration (applied to students who entered the school in 2005): - Restrictions on taking courses offered by the same professor: up to two classes (excluding research paper studies and special lectures) from the same professor are acknowledged in total credits for graduation. - Restrictions on acknowledging credits from special lectures: up to two classes for doctoral program students and four classes for integrated master’s and doctoral degree program students are acknowledged in total credits for graduation. When two special lectures are taken during the master’s program, only three credits of research paper study will be acknowledged. When the course is titled as a special lecture but actually a subject lecture, then a subject confirmation document signed by the professor in charge along with the class syllabus should be submitted to the administrative office prior to course registration. · Students in the doctoral degree program must take a three credit seminar course (4190.781 Advanced Computer Engineering Seminar). · The 4190.781 Advanced Computer Engineering Seminar (one credit) is a second class subject that sets the subtitle differently every semester, so repeated registration is possible.

Credits for research paper · Goal: Enrich the process of research paper study by giving credits and study acknowledging the time spent by the professor in charge, reducing course burden and increasing responsibility for supervising. · Registration method and grading: - Register for a course offered by the thesis adviser - Within 1/3 of the total number of completion credits for doctoral degree students (maximum 12 credits) - Maximum of 18 credits for students enrolled in integrated master’s and doctoral degree program (maximum six credits, two classes, can be taken per semester) - Grading scale is S (satisfactory)/U (unsatisfactory)

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 231 Credit acknowledgment Among the excess credits over 24 obtained during the master’s program, a maximum of 12 credits can be acknowledged as credits completed during the doctoral program as long as the grade for the class is over B0 (when the student earns a master’s degree from Seoul National University and enters the doctoral program of SNU). In this case, one must submit a credit acknowledgment request between the master’s and doctoral degree as well as a transcript at the beginning of the semester when announcement for submission is made. When a graduate school student wishes to take courses offered in the bachelor’s program (general education courses are not disallowed), up to six credits can be obtained as part of the grade earned during the master’s program once it has been approved by the dean. A credit acknowledgment application must be submitted during the course registration period. For master’s courses that are not part of the major (department), up to 1/2 of the total completion credits of the program can be acknowledged when the course has been recommended by the professor and approved by the dean. Yet, the credits earned by taking bachelor’s courses are included in the restriction of 1/2 of the total completion credits. The grades for prerequisite courses of a bachelor’s program are not included in the final grade for completion, but they are included for evaluation of completion. A credit acknowledgment request must be submitted when a student wishes to take a course offered by another department and wants the credit acknowledged as part of the completion credits.

Regulations on course · Article 1 (Courses Taken) Students enrolled in master’s and doctoral completion for obtaining degree programs should take four subjects from three sectors out master’s and doctoral degrees of ten categories of graduate school courses (1+1+1+1 or 2+1+1) and should obtain a grade over B0. This regulation is not applied to doctoral program students who earned a master’s degree in computer science from Seoul National University (revised September 16, 2010). · Article 2 (Field of Study) The fields of study are outlined below, and subjects for each category are determined by the Education Management Committee. Without any regulation revision on the subject, it will adhere to the classification made and used until the second semester of 2007.

Courses offered by field of System Software study Advanced Operating Systems Advanced Compiler Construction Topics in Compiler Construction Topics in Operating Systems Understanding Operating Systems Topics in System Software Programming Systems Advanced Programming Languages Static Program Analysis Topics in Programming Languages Understanding Programming Languages

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Note: Article 3 (Substitution of Courses) Subjects that are not specified in Article 2 can substitute for courses that are required by Article 1. Prior approval from Academic Affairs is needed for substitution to be acknowledged. Students that are applying for the substitution must receive an approval from the adviser before registering for the courses and submit it to Academic Affairs. Academic Affairs will assess the appropriateness of the course, academic development, and the student’s field of study to determine the approval. A maximum of one course from another department/faculty can be substituted (revised on July 27, 2011).

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 233 3.4.2. Thesis Application Qualification Exam

Department of Economics Doctoral Degree Program

Necessary requirements Students who have finished master’s courses/students who have registered for two or more semesters with nine or more completed credits, and students who have registered for five or more semesters with 36 or more credits completed in the master’s/doctoral integrated courses.

Exam Subjects Section Subjects

Foreign Language Test English Further Studies in Basic Common Microeconomics General Exam Subjects Further Studies in Macroeconomics Major Subject 1 course of th major's fields

Major fields: Industrial Organization, Public Economics, Input-Output Analysis, Econometrics, International Trade, International Monetary Economics, Money and Finance, Political Economy, Labor Economy, Technology and Development Economy, Financial Economics, History of Economic Theories, Business Organizations and Growth, History of the Korean Economy, Economic History, Population and Economy, Economy during Shifts, and Theories of Economic Systems ※ If the student’s professor is abroad, one must determine whether the professor can distribute and mark the examination questions and submit the application forms. Re-exams are possible upon failure.

Exam schedule There are two Thesis Application Qualification Exams in the middle of March and September. Application forms are submitted to the office according to the schedule announced at the beginning of every semester.

Requirements to pass 1) English: Students who have entered before 1999 with scores of 70 or higher in their entrance test are exempted from the English test. For students who have entered after 2000, English tests are exempted on the condition that students have taken the TEPS-TOEFL test or have submitted test scores. Those who have not been exempted must take either the TEPS or TOEFL test before submitting their theses (beginning of April in the first semester, beginning of October in the second semester) and exceed the bottom line set by the relevant department.

2) General Exam: In order to pass the test, students have to earn scores of 70 or higher (out of 100) for each subject they take. Unsuccessful subjects can be taken again later. For basic common courses, students with grade B+ or higher can sit for exams and can accept the result for grades. In cases where students want the exam results to be accepted as grades, they also should submit application forms and student records.

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Necessary requirements Students who have enrolled in a doctoral degree program for over two semesters and obtained over nine credits

Exam subjects · After submitting the application, thesis application qualification exams are carried out by the Thesis Advising Committee for each student. · English: Follows accrediting system. Can be replaced by TEPS or TOEFL scores (scores beyond what is needed for submitting thesis screening).

Exam schedule Applications for thesis qualification exams are accepted in March or September (after applying at the beginning of the month, examinations will be held at the middle/end of the month).

Requirements to pass English (score of over 551 for TEPS for students enrolled before 2008, over 550 for students enrolled between 2001 and 2007,and over 203 for TOEFL CBT).

Integrated Master’s and Doctoral Degree

Applications must be submitted in March or September for the thesis qualification exam if one wishes to take the exam and acquire a doctoral degree. The thesis qualification exam is composed of testing on the knowledge of the major and foreign language.

Necessary requirements Students who have enrolled in the integrated master’s and doctoral degree program for over five semesters and obtained over 36 credits.

Testing of knowledge of the After submitting the application, thesis application qualification exams major are carried out by the Thesis Advising Committee for each student.

Foreign language exams English: Follows accrediting system. Can be replaced by TEPS or TOEFL scores (scores beyond what is needed for submitting thesis screening). TEPS over 551 for students enrolled before 2008, over 550 for students enrolled between 2001 and 2007, over 3+(501) for students enrolled before 2000 TOEFL (CBT) over 201 for students enrolled after 2001, over 193 for students enrolled before 2000 TOEFL (iBT) over 77 for students enrolled after 2001, over 69 for students enrolled before 2000

Note: If a student enrolled in an integrated master’s and doctoral degree program wishes to graduate in the middle of the program after receiving the master’s degree, then the student must submit a document to renounce the enrollment in the integrated program and take the master’s thesis qualification examination.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 235 Department of Computer Science and Engineering

Necessary requirements For doctoral degree: students who have enrolled in the program for over two semesters and have taken the class on environmental security.

Examination schedule Beginning of March and September every semester

Exam subjects and Refer to the internal regulations of the Department of Computer requirements to pass Science and Engineering (written in 2009 second semester); refer to the fourth article for doctoral program.

Thesis qualification for · Implementation: Exams will be in oral examination format. After doctoral degree selecting a particular topic of one’s field of study, a thesis for preliminary examination will be written in English and then presented Preliminary examination for in English in front of a committee ofthree full-time professors. doctoral degree The committee scores the presentation. Candidates who receive over 70 out of 100 will pass the exam. The time and venue for the presentation should be informed to the administrative office, and the thesis for preliminary examination should be submitted to the person in charge at the administrative office. All students enrolled in the doctoral degree program can apply for dissertation examination starting from the next semester after they pass the qualification exam (in other words, students cannot be assessed with their dissertation in the same semester that they pass the qualification exam). · Content of thesis for preliminary examination: The main purpose of the preliminary examination is to evaluate the direction of the dissertation by presenting the content. Therefore, the topic of the preliminary examination must be related to the dissertation, and it should be presented in a way that clearly captures the proposal of the dissertation: title of thesis (can be changed until the last assessment), literature review and research motive, key research content, expected research results, etc. · All students in the doctoral degree program must comply with the regulation, even those who enrolled in the program before the first semester of 2009.

236 • 2015/16 Knowledge Sharing Program with Uzbekistan 3.4.3. Dissertation Evaluation

Department of Economics Doctoral Degree Program

Qualifications to submit Four or more semesters of registration until the semester when theses the theses are submitted, acquired credits from mandatory major courses and master’s course should exceed 60 credits, average GPA of the doctoral course should be above 3.0, and passing of the thesis application qualification exam.

Application deadline The deadline for graduate course theses is within six years (12 semesters) of completion (periods of military service are not included and for once a two-year extension is available).

1) Extension of the thesis application deadline If these are not given under compelling circumstances, in June or December of the last (12th) semester, a form should be submitted to the department office to extend the deadline for two years.

2) Registration as research student for those who have exceeded the deadline For students who have exceeded their deadline, if they have justifiable reasons, they can register as research students and finish certain credits. After that, they will be given another chance to submit their thesis. Every June and December, a form should be submitted to the department office to do so. (However, the completion of credits and the presentation of the thesis must be done within two years of approval, otherwise, the student will be deprived of his chance to submit his thesis forever).

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 237 Procedures (1) Selection of thesis supervising professor and submission of written scheme on preparation of the thesis a) Students intending to submit a thesis need to select a supervising professor for the thesis within two semesters after entrance (regulation from the administration office applied to students who have entered after the first semester of 2006). b) If students want to change their supervising professors, it can be done within one semester after the supervising professor is selected. However, under compelling circumstances, even after one semester, the professor can be changed under the recognition of the dean and the graduate school president. c) The lecture research assistance recommendation professor and the supervising professor must be the same.

(2) Presentation of the thesis research results Before submitting the thesis for inspection, students have to present their research results in presentations led by the supervising professor more than twice for two semesters. However, under the professor's decision, presentations can be held more than twice in one semester.

* References - Under the lead of the supervising professor, the schedule, format, and number of participating judges will be decided. - The time of the presentation is available including the semester for doctoral thesis screening registration. - The format of the presentation can be either an open presentation or a judge-only participating format.

(3) Registration of theses for screening Students need to submit the prescribed registration documents and payment of the thesis screening fee at the beginning of the semester in which he/she is willing to acquire a degree. For students who have finished the Ph.D. course, they must register as research students in the semester during which their theses are screened.

(4) Organization of the Thesis Screening Committee The Thesis Screening Committee for the doctoral degree consists of five people including two experts outside SNU (one professor in SNU can be included). The head of the committee is elected among the judges. The thesis supervising professor and outside experts cannot be head of the committee.

* Reference (qualifications of judges) - Full-time instructor with a doctoral degree or professors of SNU (assistant, associate, full time) - Outside experts with a doctoral degree who are instructors from other universities: should be above assistant professors. Researchers from research institutes: those who have worked in research fields for more than two years after acquiring doctoral degrees.

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Qualification to submit thesis Students who are enrolled or completeda graduate school program can earn the relevant degree and the diploma when they take the necessary courses and pass the thesis qualification exam (students who have entered the doctoral degree program without taking the qualification exam as an undergraduate must pass the qualification exam to start the research for their thesis).

Deadline and evaluation fee Restricted time to complete the course and submit thesis (six years for doctoral degree can be extended up to two years). The evaluation fee is ₩ 300,000.

Procedure (1) Research for the thesis (2) Preliminary examination for doctoral thesis: When it has been decided by the thesis supervisor that the research for the doctoral degree is almost completed and composition of the dissertation is possible, the student should present the outline of his study in front of theThesis Evaluation Committee of the school and receive preliminary examination. The preliminary examination takes place within a month at the beginning of the semester. (3) Thesis examination: Students enrolled in the doctoral degree program who have passed the preliminary examination or students enrolled in the master’s degree program who have been approved by the thesis supervisor on the research project or master’s thesis to receive evaluation should follow the procedures below. · Register as prospective thesis presenter and pay evaluation fee - Mid-April (for students graduating in August) or mid-October (for students graduating in February) - Students who completed the graduate school program must register as research students within the registration period. - Required documents for doctoral degrees: request for doctoral thesis examination, recommendation from thesis supervisor, résumé. · Register thesis for examination and list of publications - Abstract and list of publications in Korean and foreign journals should be submitted by the end of May (for students graduating in August) or end of November (for students graduating in February). - Students who have not published more than one research paper in SCI-registered journals (certification of expected publication will not be accepted) cannot receive the thesis examination that semester. · Thesis examination - The thesis will be examined by five paper examiners of the school one to three times. · Public presentation - Final examination by five examiners including an examiner from outside the school. - Thesis examination should be completed by the end of June (for students graduating in August) or end of December (for students graduating in February).

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 239 Procedure (4) Submit thesis as a record online Students who have passed the thesis examination should submit the thesis for record and online to the university within the given period. · Online submission of thesis - By the beginning of the next month after the examination has ended · Submission of thesis for record - By the beginning of the next month after the examination has ended · One copy must have approval from all of the paper examiners and a consent form to provide the original copy of the thesis. The title and content of the thesis for record must match the thesis that passed the final examination.

Integrated Master’s and Doctoral Degree

Students selected for the integrated master’s and doctoral degree program are recognized to be in the doctoral program once they take 12 credits per semester, complete over four semesters including the master’s program, and receive over 24 credits. Also, the requirements below should be satisfied to complete the program.

· Over 60 credits (including credits earned during the master’s program), with at least 39 credits (for theoretical physics major) or 36 credits (for experimental physics major) should be obtained from lectures and experimental classes. · Required courses: Four courses (12 credits) on Classical Mechanics, Electrodynamics 1, Quantum Mechanics 1 and Statistical Mechanics. Students who have already taken the courses in a bachelor’s or master’s program do not need to take the courses again. · One class on research paper study can be taken per semester (total credits for research paper study cannot exceed 18 until completion of doctoral degree program). · A maximum of 21 credits (24 credits for experimental physics major) can be obtained from classes on special research on physics, including classes on departmental thesis research. · Regarding elective courses, a maximum of two classes (six credits) that are taken from other universities (or other departments) are acknowledged. Additionally, one more class (three credits) can be acknowledged, but a statement of reason from the adviser should be submitted to the head of department prior to course registration. · The degree will be given when the total GPA and GPA from major subjects both exceed 3.0.

※ Students that are enrolled in an integrated master’s and doctoral degree program can earn a master’s degree once the requirements on completion are met (including thesis submission).

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Thesis submission period Six years after the completion of doctoral degree program (excluding military service period)

Requirements for thesis (Doctoral degree program) prospective doctoral degree receiver must satisfy all of the requirements below to be eligible for thesis examination. · A confirmation form must be submitted to the dean to get approval once the thesis supervisor has decided that the prospective student for the degree has accomplished the minimum amount of research needed for thesis examination. · A document listing the publications (already published or expected to be published) of which the student is the lead author excluding the thesis supervisor must be submitted to the dean to receive approval (revised on October 6, 2003). - One research paper published in an international journal or in the most recognized international conference (revised on July 7, 2014) - One research paper published in an international conference, an international journal, or a domestic journal (revised on August 12, 2009) - International journals refer to academic journals that are recognized internationally (published regularly under evaluation), international conferences refer to conferences that are recognized internationally (held regularly under evaluation), and domestic journals refer to academic journals that do not belong in the category of international journals but are published domestically (published regularly under evaluation) (revised October 6, 2003). - With approval from Academic Affairs, the prospective student for the degree can be exempted from publication of one research paper (revised October 6, 2003). - Exempted students, as suggested above, are restricted to two students (cumulated) per full-time professor. - When the prospective student for the degree receives the exemption and graduates, the first condition is regarded to have been met when the student’s paper is published after graduation and the supervisor submits certification of publication to the dean. - Additional Clause 1. This regulation is applied to all students enrolled in the doctoral degree program after August 30, 2009, regardless of the admission date or completion date. (The regulation has been eased compared to the previous regulation, so it can be applied retroactively.)

Composition of Thesis · Date of composition: After earning 51 subject credits and six months Supervision Committee for before submission of thesis doctoral degree · Thesis Supervision Committee: Three supervisors including the fulltime professors of the school or outside personnel with equal status

Others Students must attend at least one-third of all the seminars held by the department in a year. If not, it will influence the examination of the thesis.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 241 4. Policy Recommendations

Exceptional human resources, an education system, and supporting infrastructure should be established to provide first-rate doctoral degree programs(Park et al. 2009; Salmi 2009; Kim et al. 2010). The level of human resources is determined by the students enrolled in the degree program as well as the faculty that will educate the students. The education system for a doctoral degree can be categorized into coursework and dissertation. Educational infrastructure comprises administrative support, financial support, and governance to look over the entire process (see [Figure 4-3]).

[Figure 4-3] Concept Diagram for Development of Doctoral Degree Program

Human Resource Education System Educational Infrastructure

Faculty Course Work Administrative support

Student Dissertation Financial support

Govemance

Department

In Korea’s case, the three elements are managed by the department. Though laws are enacted to regulate in the big picture, detailed regulations for student selection and faculty evaluation are established by each department. Coursework and curriculum are also organized and operated at the departmental level. Departments are also the administrative organization for support and operation. Therefore, doctoral degree programs should be reorganized by departments as units.

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Faculty Numbers of Three Departments in Seoul National University

Department of Department of Department of Computer Science Economics Physics & Astronomy and Engineering Professor 29 28 23 Associate Professor 5 7 5 Assistant Professor 4 10 4 Total 38 45 32

To build an excellent department, it is most important to hire and manage excellent faculties. To offer competitive and varied coursework, each department should have a large enough faculty.

shows the number of faculty members of three departments in Seoul National University. The Department of Economics has 38 faculty members, Physics & Astronomy 45 faculty members, and Computer Science and Engineering has 32 faculty members. This represents only the tenured faculty. The non-tenured faculty such as visiting professors, adjunct faculty, and lecturers are not counted. To evaluate and prompt the academic performance of faculties, universities in Korea have ranks of professor and a tenure system(see [Box 4-6] and [Box 4-7] for details). To get a feedback and improve teaching performance, universities in Korea have a teaching evaluation system(see [the Box 4-8] for an example of the KDI School case).

[Box 4-6] Ranks of Professor in South Korea

Korea’s professors can be categorized as tenure track and non-tenure track. Professors on tenure track are those who belong to a certain school and are eligible to be evaluated for tenure and include the professors who have already been granted tenure. They are first appointed as assistant professors and promoted to associate professors after five to six years, after which, they can be promoted to the position of professor.

Non-tenure track professors are temporarily appointed to the position through contract. In this case, they are not subject to tenure, and lecturing professors, invited professors, adjunct professors, and part-time instructors belong to this group. Lecturing professors are those who are in charge of delivering lectures without evaluation of their research. Even though they work at a school fulltime, their retirement is not guaranteed, and they need to renew the contract once the contracted period is over. Invited professors are prominent scholars domestically and overseas or those who held high-ranking positions in the government or industry, and they teach at schools without tenure. In most cases, invited professors have long work experience before signing a contract with a school. Adjunct professors simultaneously work and teach. They mostly work as a professional in other sectors while being in charge of lecturing a practical course. Part-time instructors teach part time at a school. Since they do not belong to one school, part-time instructors teach in several universities.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 243 [Box 4-7] Tenure System in South Korea

The tenure system is a system that secures a position at a school to an eligible professor until his or her retirement age.

When a professor is appointed to a tenure track, he is tested on his ability as a scholar for a designated period to decide whether to grant tenure or not. When the professor receives tenure, he can work at the school until retirement, regardless of his performance. The tenure system is a method to evaluate the academic ability of a university faculty and give incentives accordingly. However, it is difficult to assess objectively the academic ability of a professor who is highly specialized in his field of study. Instead, the initial performance is evaluated to see whether the professor has reached a certain level of ability, and no further assessment is done when he passes the evaluation. The newly appointed professor puts forth effort to accumulate research achievements to be granted tenure. The professor who has received tenure tends to have ownership in the school, as he can continue to work at the university and work harder for the school’s overall development. The evaluation for tenure is done through assessing the scholarly work (research papers and books), education experiences (lectures and supervision of students’ theses), and educational administration work. In Korea, full professors with over ten years of work experience are subject of examination for tenure.

[Box 4-8] Example of Course Evaluation Form from KDI School of Public Policy and Management

Year: Term: Course code: Section: Course title: (score) Poor 1–3, Satisfactory 4–6, Good 7–8, Excellent 9–10 No. Questions Score 1 Was the professor adequately prepared? 2 Did the professor effectively deliver the lesson? 9.43 9.43 3 Did the professor respond to the students' questions well? 4 Was there sufficient interaction between the professor and the students in the class? 5 Was the professor accessible outside the classroom? 6 Was the overall course design well-structured and organized? 7 Were the reading materials informative and useful? 8 Was the course intellectually challenging and stimulating? 9 Do you feel that you have learned something valuable in this course? 10 Would you recommend this course to another student?

244 • 2015/16 Knowledge Sharing Program with Uzbekistan It is not easy to build a good doctoral program in a sound department with renowned faculty members in a short time. It is also difficult to make all departments excellent in a school. In such case, it is recommended to concentrate and invest heavily in a few schools or departments at the beginning. The development of KAIST is a good example (for details, see Hwang et al., 2010).

It is also important to make doctoral students write good dissertations. The Korean government and the Korean Council for University Education strongly recommend adopting a variety of policies to boost the quality of dissertations (Ministry of Education, Science and Technology, 2013). They monitor if there is any significant violation in coursework procedure. One faculty member may supervise less than six doctoral students (The European University Association recommends that one faculty member supervise four to six students). Research ethics is also important. To handle ethical issues, the Institutional Review Board is built in many schools. Several schools ask for doctoral students to submit a written oath for research ethics when they submit their dissertations to prevent plagiarism. It is encouraged to publish dissertations in an academic journal or make presentations at a conference. All dissertations are digitalized and can be searched for at the Research Information Sharing Service, which is managed by the Korea Education and Research Information Service.

It should be admitted that it is difficult to finish a doctoral study that has a strong curriculum and a rigorous dissertation writing process within three years. According to the KRIVET Issue Brief(2013), 61.2 months (five years and one month) is usually needed to finish doctoral study in South Korea. Even the medical sciences, which request the shortest study(48.8 months), take longer than Uzbekistan by one year. The humanities request the longest study(77.3 months) and social sciences (57.6 months) is close to the mean. To pursue quality and quantity of doctoral study in Uzbekistan, it should be considered to reschedule the doctoral study to four to five years and give extra time when necessary.

The following measures are proposed to improve the process of training of scientific personnel in Uzbekistan: • Engage national expert scientists [with doctorate degrees (Ph.D.) from prestigious universities of the world] with high schools. Simplify thenostrification procedures of foreign Ph.D. diplomas. Recognize 500 leading universities’ Ph.D. diplomas (degrees of universities of the world based on two global rankings over the last ten years that will be automatically recognized without nostrification). This will help satisfy the demand for scientific and teaching staff that has arisen because of the decreasing number of doctoral degrees in the past two years due to the transition to the new system of postgraduate higher education.

Chapter 4 _Improvement of the Postgraduate Education System and Training of Research Personnel • 245 • Introduce independent quality assurance systems in education. Improve the effectiveness of the national education system to meet the requirements of international standards based on the experience of countries such as Turkey, Malaysia, Indonesia, Chile, and Korea. This will provide the membership in various international organizations, such as the European Association (Network) Quality Assurance in Higher Education, the International Network of Quality Assurance Agencies in Higher Education, the Eurasian Quality Assurance Network, and the Accreditation Board for Engineering and Technology. Establishing independent quality assurance systems in education will allow the controlling of achievement of strategic objectives and monitoring of the education system’s indicators in accordance with international standards. An independent quality assurance system in education will verify the transparency and objectivity of institutions, from preschools to universities.

246 • 2015/16 Knowledge Sharing Program with Uzbekistan References

Hwang, Yongsoo and Kyung-Jong Kang, Modularization of Korea's Development Experience: R&D and Technical Education, Knowledge Sharing Program, Ministry of Strategy and Finance and Korea Development Institute, 2010. Kim, Sung-shick, Kyung Chan Min, Sang-Gi Paik, ByungWoog Lee, Hyunsook Yu, Hasuck Kim, and Sung Joon Paik, "A Study on How to Level Up the Quality in Graduate Education and Research Training Compatible with Global Standard" Higher Education Policy Research,Vol3(2): 27–50, 2012. KRIVET Issue Brief., Korea Research Institute for Vocational Education and Training, 2013.12.30. Lee, Jungmi, Eun-Young Kim, Giljae Lee, So-Hyun Im, Deok-Ho Jang, andKyounghee Ha, A Study on the Condition of Graduate Education Operation and Improvement Strategy. Korean Educational Development Institute, 2013. Ministry of Education, Science and Technology, A Detailed Plan for 2014 Graduate School Quota Adjustment and Foundation, Science and Technology, 2013. National Law Information Center, webpage, Retrieved on 2016.5.8 from http://www. law.go.kr/eng/engMain.do. Park, Jeong-soo, Seyoung Chun, JisungRyu, Jinyoung Kim, Jeongho Yang, Youkeoung Han, and Seung-Bo Kim, How to Develop the Quality of Higher Education for Global Competitiveness, Korean Educational Development Institute, 2009. Salmi, Jamil (2009),The Challenge of Establishing World-Class Universities, The World Bank, Seoul National University, Department of Computer Science and Engineering webpage, Retrieved on 2016.5.8 from http://cse.snu.ac.kr/en/graduate/courses. Seoul National University, Department of Economics webpage, Retrieved on 2016.5.8 from http://econ.snu.ac.kr/. Seoul National University, Department of Physics and Astronomy webpage, Retrieved on 2016.5.8 from http://phya.snu.ac.kr/page4/index2.php. Statistical Yearbook of Education 2015, Department of Education, South Korea, 2015.

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Center for International Development, KDI cid.kdi.re.kr Knowledge Sharing Program www.ksp.go.kr www.mosf.go.kr www.kdi.re.kr 94320 321221 ISBN 979-11-5932-122-1 ISBN 979-11-5932-117-7(set) 791159 9 Tel. 82-44-550-4114 Tel. 82-44-215-7762 Korea Development Institute 263 Namsejong-ro, Sejong Special Self-Governing Ministry of Strategy and Finance Korea Government Complex-Sejong, 477, Galmae-ro, Sejong Special Self-Governing City 30109,